Hedge funds gird for SEC disclosure fight

By Svea Herbst-Bayliss and Rachelle Younglai

BOSTON/WASHINGTON (Reuters) - Hedge funds are preparing for a fresh battle with U.S. regulators, who want to make large investors reveal their bearish stock bets on a regular basis.

Fund managers have already won some concessions on emergency short-sale measures announced by the U.S. Securities and Exchange Commission last month to steady sinking financial markets.

While the SEC has started collecting data on the number and value of stocks shorted by managers who invest more than $100 million, the agency said this week it would keep the data secret, reversing an earlier promise to let the public see it.

Still the loosely regulated $1.9 trillion hedge fund industry, which relies on selling stocks short to beat its mutual fund cousins' returns, is chafing at having to report any positions at all.

"You are getting more and more layers of intervention in the most entrepreneurial piece of the investment world," said Bill Laggner, a partner at hedge fund Bearing Asset Management.

Short-sellers borrow stock they expect will fall in price in the hope of repaying the loans for less and pocketing the difference. As a group, they have been vilified on Wall Street and Main Street and blamed for pushing investment banks Bear Stearns Cos Inc and Lehman Brothers Holdings Inc (LEHMQ.PK) out of business.

Now, for the first time, regulators can see the short positions that thousands of hedge funds have on their books. That frightens managers, who say anyone could copy their secret strategies if the information were made public.

Hedge fund managers hoped the SEC's disclosure requirement would disappear along with the short-selling ban when the emergency order ends, which is scheduled to occur by October 17. That now appears unlikely.

The SEC intends the order to continue without interruption in the form of an interim final rule.

"There is a real sense of frustration about this because people want to keep their strategies under wraps. And as long as it is legal, why is the government looking?" Laggner said.

Some securities industry experts agree with worried hedge fund managers.

"If you start publishing that Warren Buffett has a short position in a stock, you might bring about consequences you are trying to avoid," said James Cox, a securities law professor at Duke University.

ALL EYES ON SEC

The SEC has not said how it would craft a permanent disclosure rule. Many questions remain about how often short positions must be reported and whether the data might become public after all.

Under the current emergency rule, managers must list their largest intraday short positions and when they held them, and also disclose their short positions at the end of the day.  Continued...