Hedge funds face losses after TSB shares soar on Sabadell bid

* Short positions on stock worth 5 bln pounds on March 11

* Dalton, Henderson, Marshall Wace took "short" TSB stakes

* Shares (Berlin: DI6.BE - news) soar more than 20 pct on Sabadell's surprise bid

By Sudip Kar-Gupta and Francesco Canepa

LONDON, March 12 (Reuters) - Hedge funds that took "short" positions betting on a drop in British bank TSB face possible losses as the stock surged more than 20 percent after a takeover bid from Spain's Banco Sabadell on Thursday.

Around 4 percent of TSB's shares were out on loan to investors betting the stock would fall - otherwise known as short selling - on March 11, according to Markit (NasdaqGS: MRKT - news) data. That was worth a total of 5.15 billion pounds ($7.67 billion) at market prices on that date.

Dalton Strategic Partnership, Henderson Global Investors and Marshall Wace had significant "short" positions of between 0.6-2 percent in TSB's share capital, according to data from Britain's Financial Conduct Authority (FCA) regulator.

Sabadell's takeover offer was largely unexpected and sent TSB's shares up 23 percent to 326 pence, below the 340 pence bid price but some 25 percent above the company's 260 pence initial public offering price in June last year.

"The fact that Sabadell has made a bid for TSB is a real surprise to me. I don't think anyone was positioned for it," said Admiral Markets' Darren Sinden.

Spokesmen for Henderson Global Investors and Marshall Wace declined to comment on their firms' stakes in TSB, while officials at Dalton could not be immediately reached for comment.

Short sellers borrow a stock and sell it, betting they will be able to buy it back at a lower price before returning it to the lender, pocketing the difference.

TSB shares had fallen nearly 5 percent since the start of 2015 and some short sellers had started to close their short positions.

The number of TSB shares out on loan fell 2.3 percent in the week to March 11 and the overall short interest in the stock has been retreating from a record high of 5 percent hit in the first month of the year.

The stock fell as low as 245 pence in September as Lloyds Banking Group sold an 11.5 percent stake in the company, which last month reported an increase in profits.

"I've been holding it since the IPO. It's just a growth stock in my opinion and the bearish views out on it were unfounded," said Ed Smyth, investment manager at JNF Capital.

($1 = 0.6712 pounds) (Editing by Susan Thomas)