Marshall Wace, the London hedge fund, hit a rare jackpot on Wednesday when three of the stocks it was betting against had the sharpest falls on the UK stock market.
The firm, whose co-founders Paul Marshall and Ian Wace are on opposite sides of the Brexit debate, made millions of pounds in profits as shares in high-street retailer Marks and Spencer, fashion chain Ted Baker and lender Metro Bank all tumbled.
The windfall comes amid hopes that short selling — a favourite strategy of hedge funds — will re-emerge as a profitable strategy after several tough years. Marshall Wace, which manages $39bn in assets, has the largest single short bets against both M&S and Ted Baker, according to regulatory data. It is also has a sizeable wager against Metro Bank.
While the three companies worried the market for different reasons, they were united by the punishment investors meted out. The three stocks ended the day as the worst performing in the FTSE All Share, which is home to 636 companies.
M&S slumped 12.5 per cent after unveiling plans for a rights issue and a dividend cut to help fund a joint venture with Ocado. Ted Baker fell 9 per cent after a profit warning. To complete the hat-trick, Metro Bank’s shares plunged 26.5 per cent on Wednesday, following a 16 per cent fall on Tuesday, after the bank announced a £350m share placement and said UK regulators were preparing to investigate an accounting error.
The drop in the three stocks means an estimated profit of about £20m, according to calculations by the Financial Times, taking into account Wednesday’s declines as well as Tuesday’s fall in Metro Bank. Marshall Wace, which typically runs a large number of short positions as part of its portfolios, declined to comment.
Kevin Arenson, chief investment officer at Stenham Asset Management, which invests in hedge funds, said short selling has become unprofitable for generalist long-short hedge funds in recent years because of the popularity of passive investing, which fund managers feel leads shares to move on money flows rather than financial performance.
Central bank stimulus, which managers blame for pushing up good and bad stocks, has also undermined short strategies, Mr Arenson said.
Marshall Wace, which bets on rising and falling stock prices, has been running a bet against M&S for more than four years, and has been increasing it slowly over time. The wager stands at 2.2 per cent of the company’s shares, according to regulatory data. Marshall Wace has been betting against Ted Baker for at least a year, and is shorting 0.79 per cent of the shares.
Retailers have suffered a “perfect storm” with factors such as changing shopping habits, rising business rates and rent pressures, said Jordan Hiscott, chief trader at Ayondo Markets, a trading platform.
Shorting means betting on a price fall. Hedge funds Pelham, Lone Pine Capital and Man Group’s GLG Partners, as well as BlackRock, also profited from the drop in M&S shares, according to regulatory filings.
Despite Wednesday’s profits, overall hedge fund bets against M&S have actually fallen sharply this year as the retailer’s shares have benefited from a rally in stock markets globally, and as funds have moved to limit their losses. The amount of the retailer’s stock out on loan — a good indication of short selling — has dropped to 12.9 per cent of the company’s shares from 16.2 per cent at the end of last year, according to data group IHS Markit.
Overall bets against Ted Baker shares, meanwhile, have held fairly steady this year and are currently running at 7 per cent of the shares, having climbed from less than 3 per cent last summer, according to IHS Markit.
Marshall Wace’s flagship $17bn Eureka fund, run by Mr Marshall, has gained 2.7 per cent this year, according to numbers sent to investors and seen by the FT, amid a brighter start to the year for hedge funds. Last year the fund was up 0.7 per cent.