Will the Extension of the Short Selling Ban Deepen the Woes of Private Equity Funds?

Short Selling Ban Neutralizes Long-Short Strategies
Stock Market Futures Utilization 'Insufficient'

[Asia Economy Reporter Minji Lee] As the financial authorities are reportedly about to announce a plan to extend the 'short-selling ban for six months,' private equity firms employing long-short strategies are experiencing difficulties.

According to the financial investment industry on the 27th, the financial authorities are expected to extend the short-selling ban, which was introduced temporarily for six months, by another six months. It has not been decided whether the ban will apply to all stocks or if a 'split measure' allowing only large-cap stocks will be implemented, but it seems that both foreign and institutional investors will find it difficult to actively employ short-selling strategies until the first quarter of next year.

Amid controversy over the temporary ban on short selling scheduled to end next month, an employee at a financial institution in Seoul was working on the 21st. The Financial Services Commission plans to hold a meeting before the ban ends on the 15th of next month to decide and announce whether to extend it. Photo by Kim Hyun-min kimhyun81@

The long-short strategy involves buying (long) stocks expected to rise and selling (short) stocks expected to fall. Currently, private equity funds employ various strategies such as event-driven, macro, multi, and mezzanine, but the most fundamental strategy is the long-short strategy. The private equity fund market's growth from 140 trillion won in 2013 to 400 trillion won today was made possible because of the long-short strategy. As domestic private equity funds began using short-selling strategies previously employed only by foreigners and achieved high returns, the net asset size tripled in seven years. Public equity funds are prohibited from employing short-selling strategies.

Therefore, there is speculation that a prolonged short-selling ban will also affect the net assets of private equity funds. Following last year's incidents such as the Lime Asset Management shock, derivative-linked funds (DLF), and Optimus Asset Management's suspension of redemptions, investor withdrawals from the private equity fund market have increased. If returns become similar to those of other public funds, interest is bound to decline further. A financial investment industry official commented on the extension of the short-selling ban, saying, "Private equity funds are facing a difficult situation in attracting more assets. If the short-selling ban is lifted, they will likely employ short strategies targeting stocks with a large gap from their corporate value to recover returns."

Private equity firms are turning to the stock futures market as an alternative. As of March, the average monthly trading volume in the stock futures market was 130 million shares, about 160% higher than last year's average monthly volume of 50 million shares. Currently, it is around 80 million shares, indicating a significant increase in futures trading volume since the short-selling ban was implemented last year. However, with only 137 underlying assets allowed and futures hedging not being smoothly executed, it is insufficient to achieve the same level of effectiveness as before.

Researcher Jeon Gyun from Samsung Securities explained, "Stock futures are effective for responding to individual stocks, so investors who used short-selling strategies have moved to the futures market, but there are clear limitations. When futures are sold and bought, the buyers must hedge again in the market, but this is not being done smoothly."

This content was produced with the assistance of AI translation services.