The hedge fund industry’s lobby group mounted a last-ditch attempt yesterday to persuade the City regulator to delay its controversial rules on short-selling, which are due to come into force tomorrow.

The Alternative Investment Management Association sent a letter to the Financial Services Authority (FSA) asking for more time for its members to prepare for the changes.

The association’s call was backed by Andrew Shrimpton, the former head of hedge fund regulation at the FSA. He said that the regulator should wait “until next Wednesday, at the earliest” to give the funds sufficient breathing space. “The FSA is skating on thin ice, using emergency powers to bring in these requirements, and is vulnerable to a legal challenge,” Mr Shrimpton said. “It should try to generate some goodwill with the industry by showing it can listen and back down in light of what it hears.”

In a surprise move last Friday, the FSA said that all investors with a short position representing more than 0.25 per cent of a company must disclose the holding if the target company is involved in a rights issue.

Short-sellers, often hedge funds, sell borrowed shares in the market in the hope of buying them back more cheaply at a later date. The FSA acted after aggressive short-sellers had targeted HBOS and Bradford & Bingley, two mortgage banks that are tapping their existing investors for fresh capital.

Heavy shorting has driven down the share prices of both companies. HBOS fell below the 275p rights issue price at one point last week, threatening to derail the bank’s fundraising process.

Yesterday, in response to a string of inquiries, the regulator published 23 assessment criteria governing whether a short position should be disclosed.

The rules, due to come into force at midnight tonight, have provoked widespread anger among hedge funds, many of which lost money in the wake of the FSA’s statement of intent last week as short-sellers closed out their positions and company share prices rallied strongly.

The FSA said that funds would have to reveal their positions only once. It suggested that its rules would be temporary, angering critics who have argued that the regulator was guilty of a knee-jerk reaction intended to ensure that HBOS’s rights issue proceeded successfully.

Mr Shrimpton said that smaller funds, particularly those outside Britain, simply do not have enough time to take advice and be prepared by the time of the deadline.

The FSA said that it would implement the new rules as stated last week.

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