2 mutual fund firms act to halt short sales
Vanguard, Columbia won't lend out shares
At least two large mutual fund companies have stopped lending out shares to short-sellers, following the broad crackdown on the controversial trading tactic by securities regulators in the United States and around the world.
The Vanguard Group Inc. is temporarily halting its lending of stocks to short-sellers. Bank of America's Columbia Management unit last week said it took a similar step. Short-sellers borrow and sell a company's shares in hopes the stock price will go lower. They then buy the shares back at the diminished prices and pocket the difference.
The moves by both companies follow the extraordinary action the Securities and Exchange Commission took on Friday when it banned the short-selling of stocks of 799 financial companies for two weeks, out of fear short-sellers are helping to drive down the share prices of the major firms in the sector and exacerbating the credit crisis. Regulators in other nations have adopted similar restrictions.
Citing the same market volatility, a Vanguard spokesman said in a statement, "We have decided to stop new lending activity for now, until such time investors regain confidence in the market and the volatility abates."
Based in Boston, Columbia funds has used the proceeds from the lending of shares to reduce fees charged to its funds' shareholders. But chief investment officer Colin Moore said Columbia fund shareholders would benefit from the lending halt, suggesting it might help arrest the drop in values of stocks in their mutual funds. The bans by Columbia and Vanguard extend to shares of all publicly traded companies, not just financial firms.
"We believe that this practice has the potential to be more detrimental than helpful," Moore said in a statement.
Columbia spokesman Jon Goldstein said the firm would no longer lend equity and debt securities but will continue to lend out government bonds that can be shorted. He added Columbia will likely resume lending the shares when markets stabilize.
Among other Boston investment firms, a spokeswoman for Fidelity Investments declined to comment on the firm's share-lending practices and said as far as the short positions it takes on some stocks, the rules "don't impact our ability to manage these assets effectively on behalf of our shareholders."
Boston's MFS Investment Management declined to comment.
A spokeswoman for State Street Corp. said it halted on Friday lending shares to investors who wanted to short any of the 799 financial companies on the SEC's list.
Short-selling often is just one among many trading strategies used by money managers. Richard Wilson, a Boston hedge fund marketing consultant, estimated there are only about 20 to 30 hedge funds nationally that exclusively use short-selling strategies, but thousands more that run "long-short" funds that use a combination of bets for some stocks and against others. These have become popular with some retail investors as well, and lately companies including Fidelity have opened their own long-short funds for retail investors.
Raj Gupta, research director at the University of Massachusetts' Isenberg School of Management in Amherst, said more fund companies would have to follow the examples of Vanguard and Columbia for such actions to have a big impact. For instance, Vanguard controls just 2.7 percent of shares in Microsoft Corp., one of the largest US stocks, and Columbia less than a 10th of 1 percent.
One hedge fund manager, speaking on condition of anonymity because of his company's policies, said the bans from Vanguard and others may affect short-selling in those companies that have a smaller number of shares outstanding.
Ross Kerber can be reached at kerber@globe.com. 