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Odey’s UK equity shorts suffer a bad month

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By Jasper Cox
04 Oct 2019

Hedge funds have been accused of backing UK prime minister Boris Johnson in order to profit from a no-deal Brexit through short positions. But the shorts that Crispin Odey’s fund has outstanding in UK companies look to have failed to deliver over the past month, with share prices of companies rising.

Furthermore, once the UK parliament moved to prevent no deal a month ago, Odey Asset Management cut back on a number of shorts, according to analysis shared with GlobalCapital.

Breakout Point, which analyses shorting data, looked at Odey’s short positions in 13 UK companies between September 4 and this Thursday, October 3. On that first date, UK parliament passed a bill aiming to block a no-deal Brexit on October 31 by forcing the government to ask for an extension to the Brexit date if a deal has not been agreed.

Between September 4 and Thursday, Odey reduced the size of its short positions as a percentage of the company’s market capitalisation in nine companies. Three positions were unchanged.

“As if someone flipped a short-selling switch on September 5, we suddenly noted a number of short positions decreases in this short portfolio,” said Breakout Point.

The only company where Odey increased the short position was in challenger lender Metro Bank.

That proved to be a shrewd bet. Metro’s share price tanked when it failed to issue a senior bond needed to meet regulatory capital requirements. Over the period analysed, the share price fell by 31%. Odey increased its short position in Metro from 3.41% to 3.65% over the period analysed.

But other short bets look not to have been successful. In nine of the 13 companies, the share price rose over the period, with shopping centre owner Intu Properties and car dealer Lookers enjoying rises of 16% and 21% respectively over the period. Odey reduced the size of its short position in both companies over that period.

The biggest short position by the value of shares borrowed is in Lancashire Holdings, the insurance firm based in both Bermuda and London. Its share price was flat at the end of the period. As of Wednesday, Odey had a £68m short position.

Short positions like Odey's have attracted political attention in the UK. Former chancellor of the exchequer Phillip Hammond said in a recent interview that some hedge funds backing Johnson stood to benefit from a no-deal Brexit. Crispin Odey donated to prime minister Boris Johnson’s Conservative leadership campaign.

The investor has told newspapers his political support for Johnson is not motivated by a desire to make profit. It is also hardly surprising in itself to see a UK asset manager with long-short funds shorting UK stocks.

“Odey’s short portfolio remains UK focused, and, according to our records, this has been traditionally so for this portfolio,” said Breakout Point. “It’s not unusual that portfolios of a hedge fund focus on their country of residence.”

But the timing of the pull-back in the shorts suggests that they may have been designed to profit from a no-deal Brexit. Over the period analysed, the chances of a no-deal Brexit on October 31 have receded. The betting markets put the probability of the UK leaving the EU on that date at around 50% at the beginning of September, but this reduced to around 25% by the end of September, according to BetData.

Odey declined to comment for this article, except to point to an article in TheGuardianwhich it said gave a good account of the overall positioning. In that article, Crispin Odey said that his fund had an overall neutral position on UK stocks, that the UK portion of his portfolio was weighted 50.6% towards long positions, and that short positions in UK companies were sometimes proxies for convictions unrelated to Brexit.

As well as Lookers, there is one other automotives company on the list: breakdown company AA. And in addition to Intu, there are three other property firms: RDI Reit, Cairn Homes and Berkeley Group Holdings. As well as Metro and Lancashire, there are several other financial firms: Ashmore Group, Jupiter Fund Management and IG Group Holdings. The remaining companies are postal service Royal Mail and semiconductor company IQE.

By Jasper Cox
04 Oct 2019