There’s no two ways about it. For American investors, the U.K. stock market hasn’t exactly been the place to be, with underperforming indices and a troubling dearth of new listings in the last few years.
There are reasons for that, from lower liquidity to the country’s relative inability to scale tech companies. But it’s possible to take Britain-bashing too far, as some Wall Street bears are discovering.
Hedge funds bet against London
According to information obtained by the Financial Times, some of the world’s biggest hedge funds have been caught off guard by sudden valuation increases in British stocks they bet would fail.
Shorting involves borrowing a stock to sell in the market then buying it back before a deadline in the hope its value has fallen.
In recent years, the U.K. stock market has appeared to be a fertile hunting ground for short sellers. British stocks have lagged U.S. peers, partly because the latter have benefited more from the recent AI boom.
Shares in the S&P 500 have jumped close to 24% in the last 12 months, while the FTSE 100 is up just over 8%.
Commentators have also decried the London Stock Exchange for its lack of liquidity, with several major companies, including travel company Tui, delisting or avoiding IPOing in London and opting instead for other exchanges. Public listings have dropped 25% in the last 10 years, as exits have exceeded new flotations.
Is London back?
Data from S&P Global Market Intelligence, viewed by the FT, shows some major U.K. companies, including BT, Abrdn, and Ocado, are attracting significant short interest.
Abrdn shares are down more than 10% in the year to date, while shares in Ocado are down more than 50%, fueling speculation that they could fall further.
But the paper reports that it’s other companies—namely those that have been M&A targets, particularly in the mid-cap range—that have burnt hedge funds like Millennium, Gerson Lehrman Group, and Gladstone Capital Management.
The underperformance of U.K. stocks has made an awkward tightrope for investors to walk.
While low and falling valuations have offered opportunities for short sellers, bargain-hunting companies are increasingly eyeing their own opportunities to acquire those U.K. firms on the cheap.
Groups including Darktrace and Hargreaves Lansdown have been the subject of takeover bids in recent months, sending their valuations soaring and leaving short-selling hedge funds on the ground.
The FT reports those offers have been particularly damaging for Millennium, GLG, and Gladstone.
For hedge fund investors who avoided the rush to U.K. mid-cap firms, the move has never made much sense.
“Shorting any U.K. mid-cap is insane, literally insane,” an unnamed hedge fund executive told the FT.
He explained the relatively small size of most U.K. stocks meant the risk-reward balance was highly unlikely to pay off.
“Your sell case has to be unbelievably compelling and feature the stock going down at least 50%.”
The report is possibly a sign that London’s stock market isn’t quite in the crisis it may have appeared to be in. Chinese fast-fashion group Shein is also set to IPO on the London Stock Exchange which could value the group at £50 billion ($63.7 billion), in another shot in the arm for the beleaguered exchange.
