UK - Pension schemes which lend securities to hedge funds must bear some responsibility for current global equity market volatility, admits a prominent scheme manager.
J. Sainsbury Pension & Death Benefit Scheme manager Geof Pearson said schemes were just as much to blame for market volatility as hedge fund managers who engage in short selling.
Pearson said pension funds – including his own scheme – are the primary source for the securities lending market and should consider their role as “aiding and abetting the hedge funds”.
He added: “They can’t make a penny without volatility.”
Short selling is a technique used by hedge funds to make profits by borrowing shares and selling them, which they then buy back at a lower price when the market falls. Critics claim that hedge fund managers have profited from an increased market volatility by aggressively targeting individual share prices and industry sectors.
Sainsbury’s remains undecided as to what stance it will take on the issue, but Pearson stressed the matter will be a top priority for the scheme’s next investment committee meeting.
Concern over the practice has has led to two heavyweight Dutch funds, the E50bn (£31bn) PGGM and the E150bn (£94bn) ABP, to write to UK pension funds – including Hermes Pensions Management – urging them to stop lending stock to hedge fund managers.
Friends, Ivory & Sime chief investment officer Richard Talbut agrees that funds should stop lending and said: “I am concerned that this instability is feeding a further deterioration in investor confidence.
“The danger is that this creates a further disconnect from what I see as being a fundamentally sound financial system in the UK.”
Talbut’s views were echoed by FSA chairman Howard Davies who believes the market requires greater disclosure on hedge funds short selling positions.
The FSA is now conducting a review into the regulatory framework of hedge funds with a report due this autumn.
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