Hedge fund millionaires backing Boris Johnson will make a killing from a no-deal Brexit, according to the former chancellor Philip Hammond. The claim is these “short sellers” are betting on big falls in share prices and the value of sterling in what critics say is a classic example of “disaster capitalism”. But how do they do it, who are they and are they all merchants of doom?
Tell me how shorting works
The conventional way to make money from shares is to buy at a low price then sell at a high price. It is called going long. Shorting is the opposite: buying high and selling low.
The approach of hedge funds is to target a share they believe is heading for a fall. But the only way to make a profit is by not really owning those shares in the first place, rather “borrowing” them. Typically, the hedge fund borrows them, at a small fee, from a pension fund that is holding them for the long term.
The investor (speculator is probably a better word) borrows, say, 10,000 BP shares and promises to return them at a fixed time – let’s say in a month. The speculator instantly sells the BP shares at the going market price – say 500p, giving them £50,000.
Sounds super. Should I try it? Probably not. The most you can lose when investing conventionally is the value of the share. In shorting, it’s possible to lose more. If the share you are shorting soars in price then you have to go back into the market and pay for it – possibly much more than your original investment. It’s one reason the Financial Conduct Authority is not especially keen on shorting among small investors.
Marshall Wace manages about $39bn (£32bn) from its Mayfair HQ, and was co-founded by Paul Marshall and Ian Wace. In January they penned an article for the Times (paywall) titled “Let’s hurry up with Brexit: there will be benefits for all”.
Odey has big short positions against Intu Properties, which runs 17 shopping centres across the UK, the retailer Debenhams, and builders Berkeley Group and Cairn Homes. But he also has a big position against Lancashire Holdings, a London- and Bermuda-based insurer involved in aviation, energy and marine insurance. Another of his big shorts is in IG Group – the world’s biggest providers of CFDs, the very instrument that is most used to carry out shorting.
Do you have to have an address in Mayfair? Hedge funds prefer the West End of London rather than the City or Canary Wharf, reflecting their super-rich clients. Marshall Wace’s head office is on Sloane Street in Chelsea, while Odey’s office in Mayfair is a short stroll from the Dorchester hotel. In the US, they seem to cluster around Greenwich, Connecticut, a super-rich enclave just outside New York.
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