Hedge funds grilled by UK Treasury committee

John McFall has told hedge fund managers the public sees them as profiting by the misfortune of others through short selling

LONDON - The UK Treasury Select Committee has warned four leading hedge fund managers that they are alienating the public while making "shed loads of money". The remarks were made with regard to hedge fund short selling - the subject of a four-month ban that expired on January 16 - which has been blamed for plunging share prices of UK banks.

Chairman of the select committee John McFall said: "You're snubbing the public; not only that, but you're making shed loads of money."

Hedge funds have been blamed for causing banking instability by their practice of short selling. This means borrowing shares in firms and selling them on, before waiting to buy shares back at lower prices and hand them back to the lender, taking the profits. Critics say it was to blame for collapsing share confidence at UK banks HBOS in September 2008 (now merged with Lloyds TSB into new bank Lloyds) and at RBS (subsequently 70% nationalised) earlier this month.

The Financial Services Authority maintains that shorting is a legitimate market practice under normal conditions, and has relaxed its ban, although enhanced disclosure of shorting positions is still in place until June 2009.

Douglas Shaw, head of alternatives at hedge fund BlackRock, said: "Some hedge funds have made profits from declines in bank shares, but I do not think it is right to say that they have made money out of the misfortunes of others."

Paul Marshall, co-founder of the Marshall Wace hedge fund, said: "We are not proud of it but hedge funds lost an average 18% last year. Blaming hedge funds is like blaming the passengers on a bus crash."