Most Frequently Shorted UK Shares

By Simon Kerr

The FSA has been gathering information on the short positions held by investors for some time – it has been part of the Hedge Fund Survey for several years.  During the Credit Crunch a disclosure regime for significant net short positions in the stocks of UK financial sector companies was introduced, and then a disclosure regime was introduced for UK stocks undertaking rights issues. Disclosures to the FSA have been required of net short positions of 0.25% of the issued equity or above for stocks of companies in these categories.

With the EU Short Selling Regulation (EU No 236/2012) coming into effect on 1 November 2012, notification to the FSA is required for net short positions of 0.2% of the issued equity or above for all Listed companies. And the Regulation requires that net short positions of 0.5% or above in shares should be publicly disclosed. This is now available on the FSA website in spreadsheet form.

For some time subscribers to Data Explorers (now owned by Markit) could find out the most borrowed stocks in the UK market, and clients of prime brokers get good information flow on the availability of stocks to borrow and where the pinch points are by stock and sector. Hedge fund managers get very good colour on stock borrowing patterns and the dynamics of the activity from these sources.

Named  Short Sellers

The newly available information from the FSA is only of some  use to hedge fund managers, given their existing resources, but there are a few things to chew over. For example, Data Explorers has made publicly available which shares were the most heavily borrowed in the market.  So the stock market will have discounted that Ocado, Marks & Spencer  and Weir Group have each been the most shorted UK shares at some point this year.  The new information on the FSA website is who has the larger short positions (as a percentage of the capital of the company), and perhaps most interesting of all when do these larger positions change – get bigger and are reduced – and by which firms.

Each of the three companies named still have fund managers shorting them to a significant degree. Via the FSA website we know the names of the largest bears of the shares.

source: FSA

The information starts to become interesting at the level of the individual shorter:

BlackRock is short both retail shares – is this a sector bet or is it business model specific? BlackRock is also short Greggs, and Home Retail so it is difficult to say which but probably the latter. The FSA website also shows that BlackRock (about who’s shorts there is more information than anyone else on the site) have a series of disclosable shorts in UK construction/contracting/service sector shares, namely Balfour Beatty, Barratt Developments, Cape PLC,  Carillion, Costain Group, Interserve, Kier Group, MITIE Group, and Serco.

Ocado has been shorted by managers with a bias to fundamentals (Kynikos, BlackRock, Dalton and Parvus) as well as by managers with a bias to trading (S.A.C. Capital Advisors), and a quant manager (Oxford).  Dalton, Newedge, Ardevora, BlackRock, and GMT Capital have been cutting their shorts  in Ocado this month, at the same time as Jim Chanos at Kynikos has increased his short in the on-line grocer.  Is the combined wisdom of  those reducing their short better than Chanos? There are 11 disclosed short positions for Ocado more than any other company on the list.

There were ten money managers shorting Weir Group at beyond the 0.5% of the capital level at the beginning of the month. Both Highbridge and Merchants’ Gate Capital increased their shorts in Weir to a very minor degree in the first week of November, and Highbridge went back to the start of the month  level of short by the next week.

Weir Group is Lansdowne Partners‘ largest publicly visible UK short – so it must be among its highest conviction UK shorts. Lansdowne is also short of Petrofac, whose shares have some of the same factor bets as Weir Group.  Like Blackrock, Lansdowne has some retail related shorts, but different names – WH Smith, Morrisons Supermarkets, and Tesco. The UK hedge mavens have been increasing their short in Aggreko this month, and are negative on three energy plays (APR Energy (a very big short at 3.27%), Tullow Oil and Ophir Energy).

Weir Group is big short of John Griffins’ Blue Ridge Capital. This alumnus of Julian Robertson has a stated methodology for shorts.  Griffin looks at the needed reinvestment to keep the company working, the major risks, misconceptions by management and the market, and an extensive media research is a necessity. The most relevant financial indicators for the Blue Ridge Capital shorts are EBIT/EV, (EBITDA-CAPEX)/EV, inventory alterations, and any recent changes in accounting guidelines are given a high ranking. When it comes to opening shorts John Griffin uses the  so-called “fantasy- transition-reality” paradigm to determine the timing, helped by earnings excuses, insider sale and the stockholders’ investment time span (long/short term, momentum investors). Given the size of position Wier Group must have had a tick for most of the items on the checklist. Weir Group and Ocado are Blue Ridge Capital’s only disclosable UK shorts.

AQR Capital Management is a quantitative money manager and will have used some of the balance sheet and cashflow statement analysis used by Blue ridge Capital to select Weir Group as a short. The full list of AQRs other UK shorts is Admiral Group, Aggreko, Burberry Group, Capita, Carnival, ICAP, IMI, Intertek Group, Invensys, Lonmin, Man Group, and Vedanta Resource

 The use of this information depends on the recipient.  The only guaranteed buyer of a share is someone who is short of it, and their activity in closing a short should be relevant to market participants. So watching for reductions in short size for disclosed holders of large size is important for its contribution to dealing flow. On the flip side a disclosable short of a UK share that increases their short size, knowing it is publicly visible, is a sign of either positive fund flows (same position size across bigger AUM), or increasing conviction.