Fund companies in recent years have rushed to roll out new funds that mimic hedge funds' strategies, including short selling. Investment research firm Morningstar Inc. now tracks 64 long-short funds, which typically blend short positions with traditional outright stock purchases, and 41 bear-market funds, which are designed to perform well when stocks fall.
The SEC's ban has become even more complex for funds in recent days as the original no-short-sale list of nearly 800 companies has expanded rapidly. Among the stocks that joined the list Monday are Ford Motor Co., General Motors Corp. and General Electric Co. "Trying to keep up with that list is a pretty challenging feat," says Barry James, co-manager of James Market Neutral Fund. "We don't like having more and more [stocks] taken away from us."
Some managers with significant financial short positions say they will avoid taking in much new cash for now. Ric Dillon, chief executive and chief investment officer of Diamond Hill Investment Group, says he would have to turn away any substantial new investment in his Diamond Hill Financial Long-Short Fund during the term of the ban, since he would be able to put that money to work only on the long side. Mr. Dillon calls the SEC's action "misguided" and says his own publicly traded company asked to be removed from the no-short-sale list. "What you've done by eliminating the short sellers is eliminated information content," Mr. Dillon says. "That's bad for markets."
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