Hedge Fund Reader : Naked Short Selling Under Probe

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November 02, 2006

Naked Short Selling Under Probe

-- By Pushpa Sathish, Staff Writer

Hedge fund Sandell Asset Management Corporation is the focus of an SEC investigation for allegedly being involved in a naked short trade, according to two investors in the fund. The company took advantage of an impending takeover by Hibernia Corp., a bank based in New Orleans, by Capital One Financial Corp. to sell Hibernia shares when they fell drastically after Hurricane Katrina struck. Capital One bought out Hibernia for a much less price than initially offered.

While trading short is a generally accepted practice, naked shorting is not always legal. Short selling is the exercise of selling shares that are borrowed on the gamble that the price will go down, which will effectively leave the seller with a profit margin. Naked shorting involves selling shares that are not borrowed before the sale.

Sandell Asset Management, which trades using event-driven strategies, has done well this year, returning 18 percent so far as against the 9 percent by other funds in the same category, according to data from Hedge Fund Research Inc. The fund manages around $4.5 billion in assets.

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November 2, 2006 in Regulation | Permalink