Hedge funds' misery as FSA bans short-selling on 32 firms

"The knee-jerk reaction of politicians is just mind-blowingly stupid," said one short trader. "Obvious pressure has been applied on the FSA to be seen to be doing something and they have come up with this little gem – the problem in the markets is nothing to do with short selling."

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However, Florence Lombard, the chief executive of the Alternative Investment Management Association (Aima), said a crackdown on short-sellers would do little to restore confidence in the banking sector. "We are not alone in doubting whether the recent bans on short selling of financial stocks taken by financial regulators are likely to achieve the intended results over time," she said.

Ms Lombard pointed out that just 3.5 per cent of HBOS shares were available on Monday for stock-lending purposes. That was nowhere near enough for short-sellers to have been responsible for the havoc on the bank's share price seen at the beginning of the week.

In fact, Ms Lombard insists that the image painted of hedge funds as irresponsible short-sellers is utterly at odds with reality. "The vast majority of people are both long and short investors. I am not aware of a single pure short-seller in Europe and there are only a handful in the US," she said.