Hedge funds take bumper profits as Carillion short positions hit lowest level since May

 
Oliver Gill
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Building Development Along The Thames In East London
Hedge funds have made tens of millions of pounds from the fall in Carillion's share price (Source: Getty)

Bets against the fortunes of beleaguered contractor Carillion have fallen to their lowest level since May.

While the stock remains one of the most shorted on the London stock exchange, a number of hedge funds have closed out positions against Carillion, booking monster profits in the process.

Just over a quarter (26 per cent) of Carillion's shares are on loan, having peaked at over 32 per cent at the start of September, according to figures compiled by IHS Markit.

In order to bet against a listed company, hedge funds and other City firms borrow shares from large financial institutions and sell them on the stock exchange with a view to buying them back at a lower price at a later date.

Marshall Wace made millions of pounds as Carillion's shares plummeted in July. The hedge fund of Brexit-backing educationalist Sir Paul Marshall had one of the largest positions against Carillion, but has reduced its exposure from 3.7 per cent to 0.88 per cent according to filings with the Financial Conduct Authority (FCA).

David Fear's Thunderbird Partners has also locked in profits. It borrowed more than three per cent of Carillion's shares, but has now sold out to below the 0.5 per cent threshold that needs to be declared to the FCA.

However, Blackrock is holding out, retaining a position of more three per cent and currently has the largest single bet against the firm.

Read more: Embattled Carillion races against the clock to find Canadian cash

Fewer shares

Part of the reason for the fall in bets against Carillion is because there are fewer shares being made available by institutions prepared to lend the stock out, according to the IHS Markit figures.

In addition, because almost all the shares available to be lent are being utilised, the price hedge funds pay to bet against the stock has rocketed, jumping to 15 per cent in recent days – which is more than 30 times the cost of shorting the average UK equity.

Experts have said the level of short positions against Carillion have been a contributing factor regarding the stock's recent volatility.

Last Friday the firm revealed a further £200m of provisions against troublesome contracts and half-year losses that had jumped to £1.2bn.

Carillion's shares fell sharply on Friday and Monday but have been calmer over the last three days. Today they are down just over two per cent at 46.51p per share.

Read more: Carillion hit by £200m of extra write-downs as government lends support

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