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Hedge funds set to make millions from Thomas Cook collapse

The Thomas Cook Airlines logo is seen at Duesseldorf Airport, Germany September 23, 2019.  REUTERS/Wolfgang Rattay
Thomas Cook counter at Duesseldorf airport, Germany. Photo: Wolfgang Rattay/Reuters

Hedge funds are set to make millions from the collapse of Thomas Cook, which went into liquidation on Monday.

The 178-year-old travel operator has gone bust after failing to secure emergency funding. Thomas Cook was the most ‘shorted’ company on the London Stock Exchange, according to publicly available data — meaning it had the most bets that its stock price would fall.

The collapse of Thomas Cook on Monday means those bets are now set to pay off, likely crystallising millions of pounds-worth of gains for hedge funds.

READ MORE: Thomas Cook is dead and 150,000 UK holidaymakers are stranded

‘Shorting’ a stock is a technique used by sophisticated investors to make money from falling share prices. Hedge funds borrow a stock from a long-term investor, sell it, and then buy it back again in the market when it comes time to return the stock. The short seller is effectively betting that the share price will fall between the time it sells and buys back. It profits from the difference.


Thomas Cook’s collapse means “there are no shares to buy back or return so they book the gain, minus the costs they incurred,” Russ Mould, investment director at stockbroker AJ Bell, told Yahoo Finance UK.

Mould said hedge funds would likely have to wait until the liquidation process was completed and the Treasury declared Thomas Cook shares worthless before officially booking profits. This process could take months.

READ MORE: What should holidaymakers do now that Thomas Cook has collapsed?

10.7% of Thomas Cook’s stock was on loan to short sellers when the company collapsed. The biggest shorts were London-based asset manager TT International, which had borrowed 3.8% of shares, and hedge fund Whitebox Advisors, which had shorted 3.1% of shares.

It is difficult to immediately estimate the amount of profit hedge funds stand to make from Thomas Cook’s collapse. Short positions were built up over time, meaning hedge funds borrowed shares at different prices as they built their bets.

However, short bets against the company crossed the 10% mark in early July when shares were still trading around 17p. A 10% bet at that level would have earned a profit of around £27m.

The true number is likely much higher, given hedge funds began building their short bets while Thomas Cook’s share price was higher. Shares were as high as 38.4p at the start of the year. The stock closed at just 3.4p on Friday.

Hedge funds are also likely to profit from credit default swaps on Thomas Cook, which are a form of insurance on the company’s debt that pays out in the event it fails to meet repayments.


Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.

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