Hedge funds bag £80m on huge crash in construction giant Carillion's share price

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Carillion's stock dived 40 per cent yesterday (Source: Getty)

A number of London hedge funds were celebrating yesterday after raking in tens of millions of pounds when shares in construction giant Carillion fell off a cliff.

Carillion chief exec Richard Howson stepped down with immediate effect as the firm issued a severe warning over its profits, revealing that it had been forced to take an eye-watering £845m provision due to problems with a string of contracts.

Shares in the FTSE 250 firm plummeted nearly 40 per cent, wiping almost £350m off its market cap. Carillion scrapped its dividend and admitted that the company has been struggling to stay within its borrowing limits.

Carillion has been one of the most shorted stocks of late with hedge funds quick to bet against its fortunes.

Eighteen hedge funds shared a near-£80m bonanza yesterday as Carillion’s stock tanked, according to analysts at IHS Markit.

Read more: From soup spoons to monsters: City analysts react to Carillion debacle

The biggest winner, according to disclosures from the Financial Conduct Authority, was Marshall Wace, the hedge fund of Brexit-backing educationalist Sir Paul Marshall, with a net short position of 3.7 per cent of Carillion’s shares.

David Fear’s Thunderbird Partners and investment giant BlackRock also had short positions equivalent to more than three per cent of the stock.

Analysis by City A.M. shows the three leading hedge funds making estimated paper profits of £11.3m, £9.8m and £9.7m respectively off the back of yesterday’s collapse in Carillion shares.

Other notable investment firms with short positions in Carillion included George Soros’ SFM UK Management, which could have gained around £2.5m yesterday.

Short sellers borrow and sell shares, in a bid to make gains if the price falls.

“I saw some of the material the hedge funds were putting out and there was not a lot of fundamental analysis to support their short positions,” one of Carillion’s major shareholders told City A.M.

“The hedgies have turned out to be correct. But I’m not sure they know why they are correct.”​

Read more: Carillion's share price is tumbling after it revealed profit fell in 2016

Former Weir boss steps in to assist Carillion

​Carillion said yesterday that former Weir Group boss Keith Cochrane would take over as interim chief executive while the firm tries to get back on track.

“It has been a perfect storm that these contracts have gone wrong at the same time and because they were all large contracts the compounding effect becomes very material,” Cochrane said.

A top shareholder, speaking on condition of anonymity, said yesterday: “Were the management caught asleep at the wheel? I think that’s probably correct.”

Meanwhile Hargreaves Lansdown analyst Nicholas Hyett said Carillion “will need to raise a significant amount more money”.

Commenting on rumours of an opportunistic takeover bid, Hyett added: “A weaker sterling helps if you’ve got an international buyer. There have been discussions today about whether Balfour Beatty would be interested [but] I just don’t see that happening. I wouldn’t say it’s inconceivable that you see another international buyer that is interested. They are mostly American.”

Read more: Carillion joint venture bags a £200m contract with the MoD

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