Wednesday, 4 July 2018

Just one more thing about hedge funds...

In the middle of the Melrose bid for GKN there was a point when the merger arb activity seemed to be falling back. Specifically, the total shorts in Melrose in the FCA's list started dropping (having been building up steadily up till that point). And one of the more active players Davidson Kempner wound down its positions - both long GKN and short Melrose.

If you look at the historical short positions  in Melrose disclosed by the FCA (and collated very helpfully by the Shorttracker website) you can see the drop in shorting activity kick in at around halfway through March (I've hung the cursor on 15th March in the screenshot).

Why? Well, that was the point when Airbus came out publicly warning that it would find it hard to work with Melrose in the event of a successful takeover (FT story in the links is from 14th March). This was a very significant intervention, and obviously some hedge funds blinked.

Then, about a week later, Elliott Advisors came out very strongly in support of the bid (despite not being a shareholder and therefore not party to it!) and the total shorts started creeping steadily back up.

The lesson here is that interventions like the Airbus statement really do make a difference. In this case it negatively affected the views of presumably pretty sophisticated market participants of the likelihood of the bid succeeding, albeit only temporarily. Something to remember next time we come up against a bid we don't like...

No comments: