David Prosser: The hedge funds get it with both barrels

Outlook: There seems to have been some anger in the Treasury about the end of the short-selling ban

Yesterday’s big gains at Barclays will also have wiped out a sizeable chunk of the very handsome profits made by hedge funds which shorted Barclays last week.

Few will weep for the hedgies and don’t expect to see the sort of sensationalist reports about these losses that followed last week’s gains. Even so, the moral opprobrium heaped upon hedge funds is now out of all proportion to the effect they are having.

Economists are well versed in the post hoc fallacy – that because A and B happen consecutively, B must have been caused by A – but it’s worth reminding the hedgies’ critics about the trap.

The decision by the Financial Services Authority 10 days ago to drop the ban on the short-selling of financial stocks was followed almost immediately by another crisis in the sector, with a series of big share price falls throughout last week. But there is not a jot of evidence to suggest the two things were linked.

It’s true that several hedge funds took advantage of the relaxation of the rules, but shorters now have to declare their positions. And there were not enough trades in place last week to account for the sell-offs we saw – not by a long chalk.

That inconvenient fact naturally did not prevent people, particularly opposition politicians, shouting loudly about the FSA’s actions. There also seems to have been some anger in the Treasury about the end of the ban, especially as the Chancellor was apparently only told about the announcement very shortly before it was made.

The fury, however, was misplaced.

The FSA seems to have decided the shorting ban was no longer needed by stripping all emotion out of the debate and judging the issue on cold hard-market principles.

Quite right too, of course, but while the subsequent political handwringing was economically illiterate – or simply opportunistic – this was a surprising first move from Adair Turner, the FSA’s new chairman. One reason Lord Turner got the top job at the FSA was that his political antennae are normally very finely tuned.

Indeed, Lord Turner must have realised that, in the current climate, dropping the ban on shorting stocks was never going to be a simple question of market principles.

It was brave of him to come to the conclusion he did.