HMV at the eye of the storm as hedge funds bet on a share dive

HMV holds the unenviable record of being the most shorted stock ever, with a staggering 30 per cent of the struggling music retailer's shares in the hands of hedge funds betting on its share price falling even more, according to market analysis firm Data Explorers.

The findings come as hedge funds predict a further battering for the FTSE, after the turmoil of the last week. Other companies singled out for more pain include Trinity Mirror, which reports interim results this week and had just over 16 per cent of its shares shorted on Friday.

Also this week, HSBC is expected to report bad debt provisions of $5.2bn (£2.5bn) in the first half of the year, up from $3.9bn the previous year. Stockbroker Oriel Securities estimates that the bank's mortgage and credit card loans to US consumers will make up $3bn of these bad loans, almost 50 per cent more than last year.

HSBC's figures will provide further confirmation of the deepening crisis in the US sub-prime mortgage market, which threatens to engulf the wider capital markets and spook already nervy equity investors.

According to Index Explorer, a subsidiary of Data Explorers, hedge funds have now taken the biggest bet for two years that the FTSE 250 will continue to fall. At the same time, the amount of short positions taken by investors on the main FTSE 100 index has fallen to a six-month low.

The last time these positions diverged to this extent, in April last year, it preceded a near-10 per cent fall in the FTSE 100, said Will Duff Gordon, director of Data Explorers.

"The markets remained soggy for two months," he said.

Hedge funds are switching out of FTSE 250 companies, seen as riskier growth investments, as well as out of retail and technology sectors and into more defensive FTSE 100 companies like oil and gas firms. The biggest increase in shorting over the last week was in the healthcare, insurance and banking sectors.

David Buik from financial spread-betting firm Cantor Index said: "We don't know to what extent the sub-prime mortgage problem is the tip of the iceberg.

"We are expecting a very bumpy road for the next three months. It will take that long to work out who owes what and who has lost what."