The Managed Funds Association (MFA), the voice of the global alternative investment industry, is criticizing regulators’ efforts to curb short selling as a way to shore up financial markets.

Richard Baker, president and CEO of the MFA, stated “MFA is concerned about the instability that is shaking the nation’s financial system. This crisis is the result of risk management failures and disclosure by the investment firms and banks that are collapsing, not the actions of hedge fund managers.”

Both the U.S. Securities and Exchange Commission and the UK’s Financial Services Authority have rushed out curbs on short selling in recent days. “The SEC’s actions and the actions of the FSA regarding short sales could result in hurting the markets that are actually functioning properly (equity and options markets), throwing them into disarray,” Baker said. “Short selling is a legitimate investment strategy that responds to market fundamentals and contributes to the proper setting of stock prices. It is also a vital component of good risk management for many investors that allows them to provide much needed liquidity to our capital markets.”

“These hastily developed rules will not solve the challenges rippling through the financial sector of the economy, but they could inflict long-term damage on the markets by reducing liquidity and may well further market instability,” he concluded.

But, troubled investment bank Morgan Stanley is applauding these moves by regulators, and efforts by New York state attorney general Andrew Cuomo root out improper short selling of financial stocks. “By initiating a wide-ranging investigation of this manipulative and fraudulent conduct, Attorney General Cuomo is showing decisive leadership in trying to help stabilize the financial markets,” it said. “We also support his call for the SEC to impose a temporary freeze on short selling of financial stocks, given the extreme and unprecedented movements in the market that are unsupported by the fundamentals of individual stocks.”

IE