Get shorty: Super funds face new pressure on short selling

Short sellers have launched a sequence of successful “attacks” on selected stocks on the ASX, often with spectacular success.

A surprise move by the world’s biggest pension fund to ban the financing of short sellers is set to send a ripple through Australia’s superannuation funds - especially industry funds - which make money from the controversial practice and have consistently defended their right to do so.

Though many investors are not aware of the role “short” funds have in their super, the biggest funds in Australia have long made precious fee-income from lending stock to short traders.

Ironically, short traders may then use these facilities to try and make money from price falls in the same stocks the super fund may already hold.

In explaining the ban, Tokyo-based GPIF - Japan’s government pension fund - said that lending money to short traders had stopped the fund from exercising “proper stewardship” over its underlying investments. It also cited the lack of transparency in the short trading market, suggesting if these issues were resolved it might return to the practice.

Short sellers make money from falling share prices and regularly borrow stock from big funds for a set fee.

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Australia’s nearest equivalent to the GPIF, the Future Fund, does not engage in securities lending.

But leading funds, including AustralianSuper, CBUS, Sunsuper and UniSuper, engage in lending to short funds as a way to access a steady line of income. They argue this insulates them from market volatility.

Ironically, one of the most shorted stocks on the entire ASX, Syrah Resources, is consistently defended by Australia Super, which is itself a lender to short traders.

The issue has been an item of regular debate at fund annual general meetings.

Pressure on industry funds

GPIF’s move to classify the ban as a key advance in its Environmental, Social and Governance (ESG) policy will put pressure on industry funds that have led in this area.

GPIF detailed that it had been making as much as $US391m ($573m) a year from lending money to short sellers.

Short sellers have launched a sequence of successful “attacks” on selected stocks on the ASX, often with spectacular success.

The recent demise of the Blue Sky Alternative Investment Group was triggered by a short-selling campaign.

Supporters of shorting argue the practice makes the market more efficient and liquid, which is in the interest of all investors.

They also argue strong companies will not be disadvantaged by short sellers regardless of the level of shorting activity.

Such logic is on show at the consumer electronics retailer JB Hi-Fi, which is regularly one of the Top 10 most-shorted stocks in the market, yet it continues to be highly rated.

Though JB Hi-Fi currently has 11 per cent of its entire market capitalisation “shorted” - the group has gained around 60 per cent over the past 12 months, tripling the wider market’s increase and ensuring anyone shorting the stock has lost money.

Not every company is willing to quietly endure shorting activity and among the more outspoken critics of the practice locally is Gerry Harvey of Harvey Norman.

But the prize for vitriol aimed against short sellers goes to Elon Musk, founder of the electric car company Tesla. It’s among the most-shorted stocks on Wall Street.

Responding to the news that GPIF was cutting out shorting finance, the entrepreneur said: “Bravo, right thing to do…short selling should be illegal.” As much as a quarter of Tesla’s entire stock on issue has been shorted in recent times.