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Get shorty: Superfunds face new pressure on short selling

A surprise moveby the world’s biggest pension fund to ban the financing of short sellers isset to send a ripple through Australia’s superannuation funds - especiallyindustry funds - which make money from the controversial practice and haveconsistently defended their right to do so.

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

Ironically, short traders may then use that money to try andprofit from price falls in the same stocks the super fund may already hold.

In explainingthe ban, Tokyo-basedGPIF - Japan’s government pension fund - said that lending money to shorttraders 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 regularlyborrow stock from big funds for a set fee.

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Australia’s nearest equivalent to the GPIF, the Future Fund, doesnot engage in securities lending.

But leading funds, including AustralianSuper, CBUS, Sunsuper andUniSuper, engage in lending to short funds as a way to access a steady line ofincome. 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 alender to short traders.

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

Pressure on industry funds

GPIF’s move to classify the ban as a key advance in itsEnvironmental, Social and Governance (ESG) policy will put pressure on industryfunds 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 byshort sellers regardless of the level of shorting activity.

Such logic is on show at the consumer electronics retailer JBHi-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 marketcapitalisation “shorted” - the group has gained around 60 per cent over thepast 12 months, tripling the wider market’s increase and ensuring anyoneshorting the stock has lost money.

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

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

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