The hedge fund industry says that a European Union proposal to publicly disclose individual managers’ net short positions is counterproductive.

A study commissioned by the Alternative Investment Management Association, and funded by Deutsche Bank, says that the EU proposal, which proposes public disclosure of individual managers’ net short positions above 0.5%, “risks distorting financial markets and is not effective in meeting the needs of companies wishing to raise capital, investors seeking efficient risk management or regulators addressing financial stability.”

The study finds evidence that such disclosure requirements result in, among other things, lower market liquidity, and an increased likelihood of short squeezes. It concludes that, “The disclosure policy proposals are complicated and will have a substantial and wide ranging impact. Regulators should consider those implications fully as part of the decision-making process.”

Additionally, the study says that a regulatory approach based on the disclosure of individual net short positions above a specified threshold “is not effective in meeting the needs of the public, industry participants or regulators.” If thresholds are enacted, the study says they should be at higher levels, to reflect meaningful ownership interest, “because public disclosure at low thresholds distorts markets”.

The study’s authors suggest publishing either aggregated or anonymous short positions instead, with more detailed confidential disclosure to regulators, as some other jurisdictions have done.

“The hedge fund industry supports increasing market transparency through the publication of aggregated short positions. We also support reporting of positions to national regulators. But as the findings of this independent study highlight, there are serious unintended consequences of disclosing individual managers’ positions to the market – including a decrease in liquidity, lower returns for end investors including retail investors, and the likelihood that investments will move to other jurisdictions where returns are not constrained by inappropriate regulations,” said Andrew Baker, CEO, AIMA.

IE