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Hedge funds are increasingly wary of betting against UK stocks after being burned by a wave of takeover bids at companies targeted by short sellers.
Millennium Management, GLG and Gladstone Capital Management are among the funds that have snapped up in recent weeks as shares such as fund supermarket Hargreaves Lansdown, cyber security provider Darktrace and video game services company Keywords Studios rose after withdrawing offers.
Hedge fund managers say that while all three companies have struggled recently, falling share prices are piqued the interest of the groups’ foreign rivals or private equity buyers, making it risky business to bet on the price’s decline. of shares.
“To short any UK mid-cap is madness, literally madness,” said one hedge fund executive who specializes in shorting stocks.
“Numbers [valuations] are so low in the vast majority of cases that a $2 billion UK company is peanuts to any mid-sized American company. Your sales case must be extremely compelling and show the stock falling at least 50 percent,” or risk losing 50 percent if the stock gets bid, the person added.
Shorting involves borrowing shares and then selling them in the market, with the hope of buying them back at a lower price.
M&A involving a UK target is 84 percent higher this year than it was during the same period in 2023, according to data from the London Stock Exchange Group, based on deal value. “The UK public-private market is particularly busy right now,” said Stefan Arnold-Soulby, partner at law firm Paul Weiss.
The wave of deals has come in response to a widening valuation gap between UK shares and markets elsewhere – particularly in the US. London’s FTSE 100 index trades at 12 times its members’ estimated earnings for the coming year, according to Bloomberg data. Wall Street’s benchmark S&P 500 index, by comparison, trades at about 21.8 times forward earnings.
Josh Jones, a portfolio manager at Boston Partners, said his bets against UK stocks are at near-record levels compared to his bullish bets.
“We bet against two types of companies: hugely overvalued stocks with low risk to buy, but there aren’t many of them in the UK market at the moment; or against businesses with fundamental problems or a bad balance sheet.
“You hope that the probability of a purchase is lower [for the latter type of business]but sometimes troubled businesses are fixable by someone else.”
Millennium, Kintbury Capital and the Canada Pension Plan Investment Board were among the funds that shorted Hargreaves Lansdown when it announced on May 23 that it had rejected a 4.67 billion pound offer from a group of private equity firms. The share price had risen 20 percent in the two weeks before the rejection.
Kintbury has covered its short position – meaning it bought the shares – in the firm, according to an investor. The hedge fund had been betting against the investment platform for five years, during which time its share price halved, so overall it still made good money from the position, the investor added.
London-based hedge funds Gladstone, Marble Bar and GLG were all short Keyword Studios when shares jumped 55 percent after the Financial Times reported it was in discussions to be bought by private equity group EQT.
Man Group, which owns GLG; CPPIB, Gladstone and Kintbury, declined to comment. Millennium and Marble Bar did not respond to requests for comment.
The losses are the latest blow to long-term equity funds, one of the oldest and most popular hedge fund strategies, many of which have suffered client withdrawals and thin returns.
The London-based manager of a small long-term hedge fund said he was nervous about the roughly $1.2 trillion in “dry powder,” or undistributed capital, held by private equity firms eager to do deals.
“Valuations are cheap and there’s plenty of cash on hand,” the hedge fund manager said. “It’s a definite risk on the short side of the ledger.”
Some managers said they were spreading their short positions across a wider range of UK stocks to reduce the damage if one of their short targets receives a takeover bid.
“You either cut it or you make it smaller,” said one long-term hedge fund manager who is taking smaller bets with new positions. “It’s about size and control [the risk].
Additional reporting by Harriet Agnew, Ivan Levingston, George Steer and Will Louch