UniSuper stops loans to short sellers

One of Australia’s largest super funds has pulled the pin on lending its stock to short-sellers as markets plunge.

UniSuper chief investment officer John Pearce. Picture: Hollie Adams

One of Australia’s largest superannuation funds, the $85bn UniSuper fund, has pulled the pin on lending its stock to short-sellers in a bid to limit price plunges on equities markets.

UniSuper, which manages the savings of university staff members told its custodian, BNP Paribas Securities Services, to suspend its stock lending program effective immediately and appeared to encourage other large super funds to also stop lending shares out to investors that bet prices will fall.

While the Australian Securities and Investments Commission has no plans to revisit the move during the global financial crisis to ban short-selling, UniSuper said any effect its move to end its stock lending program would depend on “how many funds follow a similar path”.

The move has already enraged several hedge funds that rely on stock lending programs to bet against companies on sharemarkets, as they are given just two days to hand back any borrowed stock back to UniSuper.

Short selling is the practice of investors selling borrowed shares in the hope of buying the stock back later at a lower price to make a profit.

UniSuper chief investment officer John Pearce said in a normally functioning market the fund was “comfortable lending our shares as we genuinely believe that it adds to market efficiency”

“The ability to short-sell adds to liquidity and price discovery in an orderly market. However, we are now in a market gripped by panic and we believe that restricting the ability to short-sell is in the best interest of promoting a more orderly market,” Mr Pearce said.

“We are only one fund and the efficacy of our actions will depend on how many other funds follow a similar path. Of course, we are not privy to the thinking of other funds who lend their stock,” he said.

The program will be suspended indefinitely, UniSuper said.

The portfolio manager at one leading Sydney-based hedge fund told The Australian that UniSuper had “structured this initiative to skirt legal restrictions on collusive conduct”.

“If the banks acted this way the ACCC would have plenty to say, yet somehow it’s OK coming from one of the largest domestic super funds? Short selling contributes to the healthy functioning of any market, and Unisuper’s blatant attempt to influence other institutions is the kissing cousin of market manipulation,” the hedge fund said.

Bronte Capital founder John Hempton said UniSuper’s decision was a “real doozy”.

“We are being recalled on some stocks - trivial positions - because of UniSuper recalling borrows,” he said.

Mr Pearce said as long as the short selling suspension was only something done by UniSuper, it won’t really change the dynamic of the market.

“But if predatory short sellers are a little bit more hesitant to short sell, then, well, the way we currently see it, it restores sense to the market,” Mr Pearce told The Australian.

“I’ve made it very clear we’ve made this decision unilaterally,” he said.

Mr Pearce said a lot of UniSuper members were switching their savings into safer cash investments.

“We are seeing a lot of switching, the velocity of switching is GFC-type of velocity,” he said.

South Korea’s financial regulator last week said it will ban short selling in listed shares on the Kospi and Kosdaq starting on March 16 for six months.

The UK Financial Conduct Authority also banned short selling for one day on Friday last week, in moves that could be extended when trade opens in Europe on Monday.

Federal Treasurer Josh Frydenberg has been told by ASIC there is no current need for a ban on short selling.