Hedge fund sellers burned by flurry of UK takeover bids

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Hedge funds are increasingly wary of betting against UK stocks after being burned by a wave of takeover bids for companies targeting cut-price sellers.

Millennium Management, GLG and Gladstone Capital Management are among the funds caught out in recent weeks as shares such as fund supermarket Hargreaves Lansdown, cyber security provider Darktrace and video game services company Keywords Studios jumped after attracting bids.

Hedge fund managers say that while all three companies have struggled recently, the slumping share prices are drawing interest from the groups’ foreign rivals or private equity buyers, making it risky to bet on falling stock prices.

«Shorting any UK mid-cap is insane, literally insane,» said one hedge fund executive who specializes in shorting stocks.

«Numbers [valuations] are simply so low in the vast majority of cases that a $2 billion British company is peanuts to any mid-sized American company. Your sales case has to be incredibly compelling and include a stock that is down at least 50 percent,” or risk losing 50 percent if the stock is offered, the person added.

Shorting involves borrowing shares and selling them on the market, hoping to buy them back at a lower price.

M&A involving the UK is 84 percent higher this year than in the same period in 2023, according to data from the London Stock Exchange Group, based on deal value. «The UK public-private market is particularly busy at the moment,» said Stefan Arnold-Soulby, partner at law firm Paul Weiss.

The wave of deals came in response to a widening gap in valuations between UK shares and markets elsewhere – particularly in the US. London’s FTSE 100 index is trading at 12 times the estimated earnings of its members for the next year, according to Bloomberg data. Wall Street’s benchmark S&P 500, by comparison, trades at about 21.8 times earnings.

Josh Jones, a portfolio manager at Boston Partners, said his bets against British stocks were near record lows relative to his bets on rising prices.

“We’re betting against two types of companies: extremely overvalued stocks with low buying risk, but there aren’t many of them in the UK market at the moment; or against companies with fundamental problems or bad balance sheets.

“You hope that the probability of an acquisition is lower [for the latter type of business]but sometimes companies with problems can be fixed by someone else.»

Millennium, Kintbury Capital and the Canada Pension Plan Investment Board were among the funds shorting Hargreaves Lansdown when it announced on May 23 that it had rejected a £4.67 billion offer from the private equity group. The share price rose 20 percent in the two weeks before the rejection.

Kintbury covered his short position — meaning he bought back shares — in the company, according to the investor. The hedge fund bet against the investment platform for five years, during which its share price halved, so overall it still made good money from the position, the investor added.

London-based hedge funds Gladstone, Marble Bar and GLG were short Keyword Studios when shares jumped 55 percent after the Financial Times reported that a takeover by private equity group EQT was being discussed.

Man Group, which owns GLG; CPPIB, Gladstone and Kintbury, declined to comment. Millennium and Marble Bar did not respond to requests for comment.

The losses are the latest blow to long-term equity funds, one of the oldest and best-known hedge fund strategies, many of which have suffered client withdrawals and poor returns.

The manager of a small London equity long-short hedge fund said he was nervous about the roughly $1.2 trillion in «dry powder,» or unallocated capital, held by private equity firms looking to do deals.

«Valuations are cheap and there’s plenty of cash,» the hedge fund manager said. «It’s definitely a risk on the short side of the ledger.»

Some managers said they were spreading their short positions across a wider range of UK stocks to reduce the damage if one of their short targets received a takeover bid.

«Either short it or cut it,» said a long-short hedge fund manager who is taking smaller bets with new positions. «It’s all about dimensioning and control [the risk].”

Additional reporting by Harriet Agnew, Ivan Levingston, George Steer and Will Louch

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