Although the investment freedoms introduced by UCITS III are
extensive, the rules do not allow managers to take naked short
positions, specifying instead that exposure to derivatives
should be via instruments such as contracts for difference
(CFDs) and stock-specific futures.
Managers themselves express some mystification as to why
naked shorting is prohibited under the regulations. After all,
they would deliver precisely the same strategic results via
CFDs. "The final P&L is exactly the same as you would
generate through a physical short," says Mondani at Akros. "The
only difference is that you can't sell or generate cash that
you could then use for an alternative purpose. Theoretically,
if you entered into a physical short you could use the cash
generated to leverage up your fund more materially. However, as
we typically run funds with low leverage, most of our
strategies do not need such additional tools."