August 12, 2002

UBS Argues Against Long-Only Managers' Sour Grapes

LONDON (HedgeWorld.com)--Short-selling by hedge funds is the last place long-only managers should be placing blame for the downturn in the equity markets.

In a July research report titled, "Peaches, lemons and sour grapes," UBS Warburg's global equity research group asserts that the bigger players in the market are to blame for the significant equity market fall of recent months.

"We believe that attempts to pin the blame on hedge funds is less a case of intelligent comment and more a case of sour grapes," the report reads.

With a used-car sales analogy, the research report's authors described how a market might contain more 'lemons' rather than the more desirable 'peaches' and with that market comes a lower level of prices. The first market in which lemons were detectable was the burst of dot.com bubble, which was followed by a series of accounting frauds and untrustworthy company information scandals.

Perhaps the most compelling argument that the attitude of long-only managers is generally unjustified may be the statistics showing the amount of money flowing out of mutual funds and long-only funds. UBS points to statistics from Trimtabs and the Investment Companies Institute showing that at the end of May U.S. mutual funds held US$170.6 billion in cash and that US$70 billion has been withdrawn from mutual funds since the start of June. UBS argues that to maintain that much liquidity, fund managers had to have been sellers of stock, along with life insurance companies in Europe and in the United States.

UBS estimates that hedge funds are a much smaller portion of the asset management industry than the institutional powerhouses of the mutual fund and annuity industries. The firm believes that with US$600 billion of assets under management, the hedge fund industry accounts for just 2% to 3% of global professionally managed assets. On top of that, dedicated short selling only accounts for only 0.11% of that US$600 billion in assets under management.

With hedge funds accounting for such a small portion of the market, UBS said the blame continues to be misplaced. This research report follows a number of inquiries into the role of short selling in the market doldrums. The U.K. regulatory agency Financial Services Authority has indicated that it would be interested in seeing greater disclosure on short positions, following numerous complaints from traditional asset managers.

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