Marshall Wace, one of Europe’s biggest hedge funds, has built the largest short position against Lloyds Banking Group on record, highlighting a confidence among some investors that UK bank stocks still have further to fall even after a torrid first half of the year.
The London-based hedge fund firm, which manages about $45bn in assets, revealed a 0.51 per cent short position in Lloyds in a regulatory filing earlier this month, the first time any company has made such a bet against Lloyds since current disclosure rules were introduced in 2012.
The position was worth over £100m based on Lloyds’ share price on Thursday. Shorting involves borrowing shares and selling them in the market, hoping to buy them back later at a lower price.
Shares in Lloyds have already more than halved this year, making it the biggest faller among Britain’s largest banks. That has hurt some longstanding shareholders such as hedge fund Lansdowne Partners, which has been bullish on UK stocks. As the UK’s largest retail bank with few international or investment banking operations, Lloyds is particularly exposed to a domestic downturn and is treated by many investors as a bellwether for the wider UK economy.
Virgin Money, the UK’s sixth-largest bank, which like Lloyds is tied to the fate of the domestic economy, has also been the target of increased short activity in recent weeks.
AQR Capital Management disclosed a 1.19 per cent short position earlier this month, while Systematica Investments — led by one of the hedge fund industry’s highest-profile women Leda Braga — is also betting on further declines in Virgin’s shares.
The FCA’s disclosure rules mean it is not clear how big a short position Marshall Wace held in Lloyds prior to the recent update, nor which other banks it is betting against.
Marshall Wace and Lloyds declined to comment.
Headed by founders Paul Marshall and Ian Wace, Marshall Wace manages a mixture of computer and human-run funds and the Lloyds bet is likely to be a combination of positions taken by both strategies. Its huge Tops computer-driven trading strategy analyses buy or sell signals from around 1,000 external analysts at banks or research houses to determine its bets. The flagship Market Neutral Tops fund has gained nearly 13 per cent this year.
Marshall Wace’s position is not part of a negative view on the British economy, as the firm holds an overall bet on rising UK stock prices, according to a person familiar with its positioning.
Its wager against Lloyds contrasts with the views of the majority of analysts at major investment banks. Twelve of 16 analysts reviewed by FactSet currently have a “buy” recommendation on the bank, while zero recommend selling.
Despite slumping to a £602m pre-tax loss in the first half of the year, Lloyds executives said they were comfortable with its balance sheet strength when it reported results last month, and analysts were hopeful that the second quarter would mark “a nadir in terms of quarterly profitability”.
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