UK eases rules for hedge funds in sweeping overhaul of short selling rules

The U.K.'s financial watchdog has eased restrictions on hedge funds after relaxing rules on short selling, and slashing administrative and reporting requirements.

The shift marks a major step-change in the way the Financial Conduct Authority regulates investors who bet against the value of companies, and comes as part of a broader U.K. push to cut red tape.

The FCA, which oversees U.K. financial services firms and markets, said Thursday its new framework provides "clearer and simpler" rules on short selling.

Short selling — a core component of many hedge fund strategies — involves investors betting against a particular stock or security, with the aim of profiting from a decline in its value.

The practice has often come under fire for destabilizing markets and accelerating sharp sell-offs during bouts of extreme volatility and pushing vulnerable companies into distress. But the FCA said shorting techniques play a crucial role in facilitating price discovery, liquidity, and risk management in financial markets.

Under the new framework, which takes effect July 13, the FCA will now publish aggregated data showing the overall size of net short positions in each company — a major departure from current rules that identify individual short sellers.

By removing the requirement to publicly name individual short sellers, the FCA's new anonymized, aggregated disclosure model eliminates what the industry sees as reputational and strategic risk faced by short sellers. It allows hedge funds to operate more freely without exposing their strategies or triggering market backlash, copycat trades, or short squeezes.

U.K. investors subject to the regime will now benefit from a "more workable timetable" for short position disclosures, the FCA said, easing compliance costs for the U.K.'s hedge fund industry, particularly smaller and emerging firms.

"These changes give firms clearer rules and cut administrative burdens, while ensuring we have the information we need to keep the market fair," said Jon Relleen, director of infrastructure and exchanges at the FCA.

"It is smarter regulation in action."

Phillip Chapple, chief operating officer at London-based Monterone Partners, said the new rules will make the U.K. a more attractive market for investment activity by removing transparency requirements that created issues for larger managers in the past.

"This has been achieved while ensuring the FCA retains the transparency necessary to monitor activity and markets," Chapple told CNBC.