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Hedge funds likely stung by banks rally

Date: Friday, January 30, 2009
Author: Reuters.com

Hedge funds appear to have been badly stung by this week's rally in bank stocks after the size of short positions across the sector jumped sharply in the middle of last week, industry data showed.

However, the short positions increased in most banks during a sharp share price rally early this week, showing the short sellers are betting the revival will not last.

Data compiled by Data Explorers on the amount of stock out on loan -- a good indication of how much a stock has been sold short -- show there was little rise in the amount of stock on loan in the days immediately after a ban on short-selling was lifted, but there was a big rise in the size of short positions in all banks on January 21 and January 23.

The month-long shorting ban was lifted on January 16.

Data Explorer's data showed a similar trend at all the major UK banks.

The share of Barclays Plc stock on loan had risen to 6.3 percent by Tuesday's close, the last day for which data are available, after jumping from 3.1 percent on January 19 to 5.8 percent on January 23.

The amount of Royal Bank of Scotland stock on loan jumped to 1 percent on January 23 from 0.2 percent on January 19, before edging back to 0.9 percent on Tuesday.

Some 1.6 percent of Lloyds Banking Group stock was on loan on Tuesday, compared to 0.9 percent on January 19, while the amount of HSBC Holdings stock on loan had risen to 2.5 percent from 1.6 percent over the same period.

Bank shares fell throughout last week, with Barclays shares almost halving. But Barclays clawed back all their loss this week, largely on a 73 percent surge on Monday. Lloyds and RBS have both jumped over 60 percent this week to claw back much of their losses in the previous week.

Hedge funds have been accused of profiting from the sharp fall in bank shares in the last year, and a regulatory filing on Monday showed U.S. firm Paulson & Co may have made over 270 million pounds betting on a fall in RBS shares in recent months.

Top hedge funds managers were accused on Tuesday of "making shedloads of money out of taxpayers" from their short positions in banks by John McFall, head of a Treasury panel probing the financial crisis.

But Marshall Wace Chairman Paul Marshall told the panel that many hedge funds would have lost money during Monday's rally.

Under short-selling an investor sells borrowed stock in anticipation the price will fall, allowing it to be bought back more cheaply.

(Reporting by Steve Slater; Editing by Jon Loades-Carter)