As polls predicted Britain would stay in the European Union and markets soared, hedge funds and other investors trimmed back short positions on FTSE 350 stocks. That move could now come back to bite.
UK and European markets have tanked in Friday trading.
In the run-up to the UK vote Thursday, “short sellers got it wrong and were seen covering,” – or buying assets they think will rise in value – according to Relte Schutte, a strategist at data firm Markit, which monitors short interest.
The FTSE 100 was down 6%, after paring earlier losses following a statement from the Bank of England that is would provide assistance to falling markets. The FTSE 350 was down 5% on Friday, the FTSE 250 down 8.5%.
The number of UK equity shares out on loan – a proxy for short selling – has fallen by 13.5% since the referendum was announced in mid-February, according to Markit. Hedge funds continued to trim their position in the run up to Thursday, according to Schutte.
But not all hedge funds pulled back.
London-based hedge fund Marshall Wace has short positions in a number of the biggest fallers in the FTSE 100. The hedge fund has a 1.05% short position in Berkeley Group Holdings, according to data from the UK regulator. The housebuilder, with a market cap of £3.87 billion before the market opened, was down 20% in morning trading.
A spokesman for Marshall Wace declined to comment.
The £10 billion hedge fund, which has had a tough start to 2016, has a 1.42% short positions in Berkeley Group, as well as a 2% short in Intu Properties, a UK real estate trust that is down over 10%.
Odey’s flagship fund is up around 15% on the day, according to a person close to the fund. The jump has halved the fund’s losses for the year.
“This is a black day for those who would prefer decisions to be made in darkened rooms by experts,” said Crispin Odey in an emailed statement. “What a day. But it must not go to waste and we must remember how close it was but also how brave a decision it was.”
Of course, it is unlikely that the short positions will be enough to dent potential losses. One multi-billion UK hedge fund, who declined to comment, said their shorts had not masked major losses.