Hedge funds' £1bn HBOS killing

Hedge funds may have made more than £1bn from shorting shares in HBOS, whose £4bn rights issue faced intense pressure from investors betting on the share price falling.

Almost 15 per cent, or about 550 million, of the bank's shares are out on loan, according to Data Explorers. That stock will mainly be lent to funds who have sold the shares expecting to buy them back cheaper.

HBOS's last closing share price before the cash call was announced was 495.24p, but the shares plunged during the rights issue process. At the closing price of 264.5p yesterday, short funds who bought at the closing price before the cash call was announced on 29 April would have made 230.74p a share, or a total of £1.27bn.

Six funds have announced positions since the Financial Services Authority changed its rules to require the declaration of short holdings over 0.25 per cent for companies undertaking rights issues.

The first and biggest position declared was Harbinger Capital's 3.29 per cent, which it built before 20 June, when the FSA's new rules took effect. If the US hedge fund, run by Barclays Capital's former head of trading Philip Falcone, had bought its stake at the closing price before the rights issue, it would have made £281m by selling at yesterday's closing price.

Using the same calculations for Lansdowne Partners' 0.58 per cent stake, also declared on the first day after the disclosure rule came in, would give the US fund a profit of about £50m.

Other investors to declare short positions of 0.3 per cent or less were Jabre Capital Partners, Meditor Capital Management and three separate Marshall Wace funds.

Short sellers borrow shares they do not own and then sell them hoping to buy them back more cheaply if the price falls. The practice has come under intense scrutiny during the credit crunch as financial stocks have come under pressure amid accusations of rumour-mongering and market manipulation.

The FSA brought in its new rules after the shares of HBOS and other companies conducting or considering rights issues came under massive pressure. Though fears were mounting about the housing market and the economy, the FSA said it believed there was market abuse by funds taking short positions and driving down the price.

Morgan Stanley, one of the underwriters to HBOS's share sale, declared a 2.35 per cent short position in the bank yesterday. The holding exceeded the FSA's threshold on Friday so more than 2 per cent was bought that day, probably as a hedge against the falling price of the shares.

The FSA and US regulators have tightened rules on short selling because of fears that the practice is accelerating stock market falls.

More than $1.4 trillion (£701bn) of equities worldwide are on loan, about a third higher than at the start of last year, according to data provided by Spitalfields Advisors for Bloomberg.

Roger Lawson of the UK Shareholders' Association said that short selling in rights issues left too much scope for market manipulation because it is known that a lot of stock, much of it unwanted, is going to come on to the market. There is no suggestion that holders of any of the publicly disclosed positions is involved in market manipulation.

"The market is becoming speculative and what is happening is that the big players are distorting the market. One of the ways of doing this is by shorting," Mr Lawson said. The FSA has proposed bringing in further restrictions on short selling and Mr Lawson said the regulator should go ahead with additional measures.

Fund managers made at least $1.4bn (£700m) in July from bets against Fannie Mae and Freddie Mac, the giant mortgage finance companies, according to Bloomberg.

HBOS suffered from the actions of short sellers before the rights issue was announced. Shares of the parent of Halifax and Bank of Scotland slumped 17 per cent in a few minutes in March, a fall the authorities blamed on short sellers spreading malicious rumours to drive the price down. The FSA launched an inquiry to find the culprits.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
tvThe C-Word, TV review
Arts and Entertainment
The Ridiculous Six has been produced by Adam Sandler, who also stars in it
filmNew controversy after nine Native American actors walked off set
Danny Jones was in the Wales squad for the 2013 World Cup
rugby leagueKeighley Cougars half-back was taken off after just four minutes
Life and Style
The original ZX Spectrum was simple to plug into your TV and get playing on
techThirty years on, the ZX Spectrum is back, after a fashion
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before
'Queer saint' Peter Watson left his mark on British culture by bankrolling artworld giants

'Queer saint' who bankrolled artworld giants

British culture owes a huge debt to Peter Watson, says Michael Prodger
Pushkin Prizes: Unusual exchange programme aims to bring countries together through culture

Pushkin Prizes brings countries together

Ten Scottish schoolchildren and their Russian peers attended a creative writing workshop in the Highlands this week
14 best kids' hoodies

14 best kids' hoodies

Don't get caught out by that wind on the beach. Zip them up in a lightweight top to see them through summer to autumn
Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

The acceptable face of the Emirates

Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk