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The number of “short positions” taken by hedge funds against U.K. stocks has surged by 25% in the first five months of the year, as prominent U.K.-listed companies continue to be targeted in the aftermath of market turbulence generated by COVID-19.
There were 1,569 short positions of at least 1% reported to the U.K.’s Financial Conduct Authority (FCA) between Jan. 2 to May 25 2020, 305 of 2% or more and 70 of 3% or higher, according to analysis by ETF provider GraniteShares. The FCA, the U.K.’s financial watchdog, tracks any company that adopts a short position of more than 0.5% in a U.K. stock.
This compares with 1,255 short positions of at least 1%, 291 of 2% or more, and 93 of 3% for the same period in 2019.
The largest net short position reported to the FCA during the period was 16.7% against Premier Oil
PMO,
held by Asia Research & Capital Management. Other large short positions included two from Odey Asset Management — a net short position of 3.6% against Intu Properties
INTU,
and 3.6% against Metro Bank
MTRO,
(subsequently increased to 3.95%).
Read:Hong Kong hedge fund nets £135m on record short in Premier Oil
Other FTSE 100 companies that presently have hedge fund and asset management bets adopting short positions against them include: Royal Mail
RMG,
(BlackRock Investment Management has a 3.6% short position in the postal service company); J Sainsbury
SBRY,
(Pelham Capital’s hedge fund Pelham Long/Short Master Fund has a short position worth 1.8% in the supermarket retailer); and InterContinental Hotels Group
IHG,
(Marshall Wace has a 1.5% short position in the company).
Short sellers borrow shares in the hope that they can buy them back at lower prices and pocket the difference as profit.
The FCA said in late March that it will not ban short selling in Britain, citing “no evidence that short selling has been the driver of recent market falls,” despite the major volatility fueled by the COVID-19 pandemic, and said the U.K.’s markets “have continued to operate in an orderly fashion.”
Read:Caught out by big market swings, traders rushed to short U.K. stocks in March.
Its comments came after regulators in France, Italy, Spain, Belgium, Austria and Greece imposed bans on short sales to help reduce the impact of COVID-19 on the markets. Those bans were lifted in May after regulators in the six countries cited the less-turbulent conditions.
Similar bans were put in place in 2008 in the U.S. and the U.K. to prohibit short selling in financial companies, to curb volatility and support stock markets during the financial crisis.
Read:After two months, regulators remove short-selling bans
Yet Andrew Bailey, the governor of the Bank of England, also criticized the practice of short selling in March, warning short sellers not to exploit the coronavirus outbreak. “Anybody who says, ‘I can make a load of money by shorting,’ which might not be frankly in the interest of the economy, the interest of the people — just stop doing what you’re doing,” he said.
GraniteShares says the huge market volatility in 2020 is behind the big increase in the level of shorting of stocks. It added the increased number of opportunities to short individual stocks has also likely led to capital being spread across a greater number of short positions. This would provide an explanation as to why there have been a lower number of short positions of over 3% reported.
Will Rhind, chief executive of GraniteShares, said the stock market volatility had led to opportunities to take short positions, with some investors moving to hedge risk and others looking to profit from falling prices.
“With the markets as they are today, many professional and sophisticated investors see the ability to use leverage to either go either long or short individual stocks as invaluable. It enables them to back their conviction views as well as hedge perceived risks. Looking ahead, various factors, whether it be U.S.-China relations, the looming U.S. presidential election or U.K.-EU negotiations, suggest that markets might continue to see heightened levels [of] volatility over the coming months,” Rhind said.
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