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Abstract

Disclosure rules in the United States capital markets were designed to promote fairness among all participants by providing a transparent system for equal access to information. The interpretation of information is the foundation of all prudent investment decisions; thus, an efficient capital market depends on the proper disclosure of information. Hedge funds heavily influence and play an integral role in the proper functioning of capital markets. For the markets’ benefit, hedge funds must publicly disclose their investing activity, which consists of long positions, like buying stock to sell later, and short positions, like short selling.

However, while hedge funds are obligated to disclose their long positions on Form 13F, there is no equivalent obligation to disclose short positions. Due to this “long-only” disclosure regime, the publicly available information is distorted and the marketplace lacks full and fair information. As a result, market participants and regulators are making important decisions based on misleading information, and the capital markets are left ripe for fraudulent and manipulative practices.

This Article advocates for an expanded disclosure regime that includes the disclosure of both long and short positions. A balanced disclosure mandate will optimize the functioning of capital markets by reducing informational asymmetry, fraud, manipulation, and systemic risk while promoting liquidity, efficiency, accurate pricing, and effective capital allocation.

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