On November 1, the at times secretive world of shorting became a little less opaque.
Shorting the financial act of betting against a company rather than for it has often been seen in the world beyond the boundaries of the Square Mile as somewhat nefarious. Clearly it is not, but that has been the perception.
The fact that it involves investors borrowing shares from investment banks to sell down a stock rather than own the equities themselves has not helped. Nor has the fact that the bulk of shorting or at least that which hits the headlines tends to be conducted by the less-than-visible hedge-fund community.
So when the European Union introduced rules to shine a light on the practice, it appeared that the world of shorting might, at last, begin to move out of the shadows. As the result of an EU directive, from November (Xetra: A0Z24E - news) 1, fund managers involved in shorting have been required to give details of all short positions worth more than 0.2pc of a company’s market capitalisation to the Financial Services Authority.
Positions of more than 0.5pc of the market value have to be published by the regulator. And so, since the start of the month, the FSA has produced a daily spreadsheet albeit buried in a hard-to-find part of its website that shows which hedge funds are shorting which companies.
For the first time, investors could see with a degree of certainty which hedge funds were taking specific positions in which companies.
Hedge funds cried foul, suggesting the moves would make it harder for them to profit from downward movements in companies’ share prices. But despite the initial fanfare and furore, the impact has been limited in part because of the way the information has been presented. In reality, few people other than company brokers and interested journalists will spend too much time obsessing over the detail shown in the daily spreadsheets. Further, the spreadsheet is then updated to a cumulative one.
This raises tricky issues. Take Friday’s sheet showing positions published previously. Michael Hintze’s fund CQS is shown as having a 0.71pc position against Aberdeen Asset Management on November 1 and, separately, a 0pc position on November 2. Enquiries to my man at the FSA confirm my first thought, CQS has closed that position.
The reason both are shown is down to the EU’s specific stipulations, but it makes it confusing, and at this point we’re only three weeks in. Imagine what it will be like when there is three months of data to sift, or three years.
I am told the FSA is working on tools to make the data more searchable, thank goodness, but the question remains as to whether what the spreadsheet shows necessarily reflects what is happening in the market.
Information from Markit, the financial information specialist, shows that the current most shorted FTSE 100 (FTSE Index: EO100.FGI - news) company is Weir Group (Other OTC: WEIGF.PK - news) , with 17.8pc of its shares on loan to shorters. The FSA disclosure table shows that 10 hedge funds including Highbridge Capital and Lansdowne Partners account for nearly all those shares, some 14.6pc.
However since the start of November, I’ve noticed a doubling of funds shorting Marks & Spencer (Dusseldorf: MA6.DU - news) , from two to four, with those four funds including AKO and Soroban Capital Partners shorting 2.69pc of its share capital.
Markit data, however, shows that shorting in M&S has actually fallen back, from highs of 6.4pc in May to 3.3pc of the total shares now.
The lesson here is clear the data provided by the FSA cannot be used to a third-party investor’s benefit if it is used only in isolation.
But as a way of knowing what hedge funds are up to, harnessed properly, this data could prove to be invaluable for rival funds and, increasingly, clued-up retail investors.