The Financial Times reports that hedge funds are becoming “increasingly wary” of shorting UK shares after suffering losses due to takeover bids.
The article highlights Millennium Management, GLG, and Gladstone Capital as some of the funds affected by recent bids for Hargreaves Lansdown, Darktrace, and Keywords Studios, all of which surged after attracting offers.
A hedge fund source told the paper, “Shorting any UK mid-cap is insane, literally insane,” noting that valuations are “so low in the vast majority of cases that a $2bn UK company is peanuts for any mid-sized American company.”
Shorting involves borrowing shares and selling them on the market, with the expectation of repurchasing them at a lower price.
Josh Jones, a portfolio manager at Boston Partners, mentioned that his short positions against UK stocks are at near-record lows compared to his long positions.
“We bet against two types of companies: extremely overvalued stocks with a low risk of being bought, but there are not many of them in the UK market right now; or against businesses with fundamental issues or bad balance sheets.
“You hope the probability of an acquisition is lower for the latter type of business, but sometimes businesses with issues are fixable by someone else.”
Currently, the mid-cap FTSE 250 index has dropped over 200 points, or almost 1%, to 20,699. The FTSE 100 is down 0.55%, faring better than other European indices.
The DAX, FTSE MIB, and IBEX are down 1.1%, 1.3%, and 1.5%, respectively, while the broader Euro Stoxx 600 is down 0.7%.
