Wednesday 21 March 2018

Melrose / GKN bid - is the hedge fund long/short trade unwinding?

As you'll have noticed, I've been following the Melrose bid for GKN with interest. In particular I've been looking at hedge fund activity around the bid, and the short Melrose / long GKN arbitrage trade. As I've blogged previously, one of the key players in this is Davidson Kempner, which at the start of March on its own had a short position of 3.02%. Even last week on the 15th it was at 2.55% according to the FCA's list of disclosed shorts (which shows anything above 0.5%).

The total short positions on the FCA list hit about 13.5% last week, making it (I think) the second most heavily shorted stock in that list. But according to IHS Markit data in this City AM story (which suggests investors are shorting Melrose in the hope the bid fails, which I don't think is right, but hey) the actual total short positions might be over 20%. That's an amazing amount really - about a quarter of Carillion shares were being sold short when it was in real trouble.

Well, today I checked the FCA list and the total of Melrose short positions they report is down to 11.6% (so now about the fourth most shorted stock in the list). And Davidson Kempner is no longer in the list (it's possible it has a position below the 0.5% above which the FCA reports).

When I had a quick look for market disclosures I found that the firm had reduced both its long position in GKN and its short position in Melrose this week. Assuming it had a long position in GKN roughly equivalent to its short in Melrose, this may mark the departure of quite a big investor with a big interest in the bid going ahead.

This is worth keeping an eye on. The total shorts in the FCA list have bumped around a bit, so the departure of one big player may not mean that much, or herald a wider retreat from the long/short trade. But it looks... interesting. I'll have a dig into who else is moving - Sand Grove has built up a big short position for example.

Just a thought, but if you wanted to speculate against the speculators this might be time go long Melrose. If the bid fails while between 10% and 20% of Melrose stock is sold short, and the price starts climbing, there's going to be some hedge funds buying back a lot of shares, quickly.

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