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Hedge fund short sellers burned by flood of UK takeover bids
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Hedge funds are increasingly wary of betting against UK shares after being burned by a wave of takeover bids for companies targeted by short sellers.
Millennium Management, GLG and Gladstone Capital Management are among the funds that have been caught off guard in recent weeks, as shares such as fund supermarket Hargreaves Lansdown, cybersecurity provider Darktrace and video game services firm Keywords Studios soared after attract offers.
hedge fund Managers say that while the three companies have struggled recently, the crushing share prices are sparking interest from these groups’ foreign rivals or private equity buyers, making betting on falling share prices a risky business.
“Shorten any UK mid-cap It’s crazy, literally crazy,” said a hedge fund executive who specializes in shorting stocks.
“The numbers [valuations] they are so low in the vast majority of cases that a $2 billion British company is a pittance for any medium-sized American company. Your sell case must be incredibly compelling and feature a decline of at least 50% of the shares” or there is a risk you could lose 50% if the shares receive a bid, the person added.
Short selling involves borrowing shares and then selling them on the market, hoping to buy them back at a lower price.
Mergers and acquisitions involving a UK target are 84% higher this year than 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 especially busy at the moment,” said Stefan Arnold-Soulby, partner at law firm Paul Weiss.
The wave of trading came in response to a huge valuation disparity between UK stocks and markets elsewhere – especially the US. London’s FTSE 100 index trades at 12 times its members’ estimated earnings for next 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, portfolio manager at Boston Partners, said his bets against UK stocks were at near-record lows relative to his bets on rising prices.
“We bet against two types of companies: stocks that are extremely overvalued and have a low risk of being bought, but there aren’t many of those on the UK market at the moment; or against companies with fundamental problems or bad balance sheets.
“You expect the probability of an acquisition to be lower [for the latter type of business]but sometimes companies in trouble can be fixed by someone else.”
Millennium, Kintbury Capital and Canada Pension Plan Investment Board were among the funds that shorted Hargreaves Lansdown when it announced on May 23 that it had rejected an offer of £4.67 billion by a group of private equity firms. The share price rose 20% in the two weeks before the rejection.
Kintbury covered its short position — meaning it repurchased shares — in the company, according to an investor. The hedge fund has been betting against the investment platform for five years, during which time its share price has halved, so overall it has still made good money on the position, the investor added.
London-based hedge funds Gladstone, Marble Bar and GLG were all short Keyword Studios when shares soared 55 percent after the Financial Times reported it was in discussions to be acquired by private equity group EQT.
Man Group, owner of GLG; CPPIB, Millennium, Gladstone and Kintbury declined to comment. Marble Bar did not respond to a request for comment.
The losses are the latest blow to long-short equity funds, one of the oldest and best-known hedge fund strategies, many of which suffered customer withdrawals and lackluster returns.
The manager of a small London-based long-short equity hedge fund said he was nervous about the roughly $1.2 billion of “dry powder,” or unallocated capital, held by private equity firms interested in making business.
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“Valuations are cheap and there is a lot of cash available,” said the hedge fund manager. “It’s a definite risk on the best-selling side of the book.”
Some managers said they were spreading their short positions across a wider range of UK stocks in order to reduce the damage if one of their short targets received a takeover offer.
“Either you cut the short position or you shorten it,” said a long-short hedge fund manager who is making smaller bets with new positions. “It’s all about scaling and controlling [the risk].”
Additional reporting by Harriet Agnew, Ivan Levingston, George Steer and Will Louch