New Ocado ecommerce deal turns screw on bearish hedge funds

* Signs deal with Sobeys; shares up more than 20 pct

* Hedge funds had bet on share price fall

* Ten funds had short positions over 0.5 pct - filings

By Simon Jessop

LONDON, Jan 22 (Reuters) - Hedge funds which have bet on a fall in the share price of Ocado will have taken a hit after the online retailer unveiled a new international technology deal which sent its stock up by more than a fifth.

Canadian retailer Sobeys has agreed to use Ocado's e-commerce technology to expand its online business. It follows a similar deal in November between Ocado and French rival Casino that also helped to boost Ocado's shares. .

Ocado was a favoured as a "short" bet amongst hedge funds throughout 2017 partly because of divergent views among investors over whether the company is a food retailer or a technology provider able to command a high valuation.

Short selling occurs when a fund borrows shares and sells them, hoping to buy them back at a later date for a lower price, before returning them and booking a profit.

According to market data provider Astec Analytics, around 10 percent of the company's shares are held by short sellers.

The number of Ocado shares out on loan had fallen by around a quarter from a mid-November high of around 85 million, before the Casino deal was announced, to around 60 million heading into the weekend, data from Astec Analytics showed.

But a number of hedge funds were still heavily invested, with around 60 percent of the shares that had been put up for loan by pension funds and other long-term investors actually out on loan to hedge funds, the data showed.

Regulatory filings up to the close of business on Friday showed 10 funds had short positions in Ocado shares in excess of 0.5 percent of its issued share capital, the level at which British finance industry regulator the Financial Conduct Authority requires disclosure.

Funds also have to make a public announcement for every 0.1 percent increase or decrease above that level.

The biggest position heading into Monday was held by Discovery Capital Management, with 3.1 percent, the FCA said.

Other big holders included GMT Capital Corp, with a 2.3 percent short position; Marshall Wace, with 1.7 percent; and JPMorgan Asset Management, with a 1.1 percent position, the FCA data showed.

"The shares have surged from 2.38 pounds in November to close last week at 4.13 pounds, a rise of some 74 percent," David Lewis at Astec Analytics said.

"Short sellers, who had made substantial sums on the rollercoaster-like performance of the company's share price, have been hurriedly closing out of their positions as the shares recover."

With (Other OTC: WWTH - news) so many shares out on loan, any positive news has the potential to spook funds into trying to buy back the shares, fuelling share price gains in what is known as a "short squeeze".

At 1445 GMT, shares in Ocado were up 20 percent.

If every fund with a short position in Ocado tried to exit the trade at the same time, it would take around 24.7 days, based on the average daily traded volume in the shares, the Astec Analytics data showed. (Reporting by Simon Jessop. Editing by Jane Merriman)