Hedge fund makes £13m short-selling Aviva

Date: Monday, March 9, 2009
Author: Mathieu Robbins, The Independent

Lansdowne Partners, the hedge fund, has made almost £13m from a short position in Aviva – and stands to make more if the beleaguered insurer announces a rights issue.

The London-based investor has had a net short position on 0.27 per cent of Aviva shares since 13 February. The stock has since tumbled to less than half its value and on Friday a trade could have netted the fund £12.7m.

Hedge funds which made a killing last year short-selling banks ahead of rights issues are turning their attention to the insurance sector.

Lansdowne last month made a possible profit of almost £2.7m from short positions in Old Mutual and Legal & General, and has continued with trades in Aviva and Prudential. Lansdowne is not alone. Rivals including Odey Asset Management, Diamondback Capital and Gilder Gagnon Howe have also been playing the game.

The practice is causing squeals from the targets. Philip Scott, the finance director at Aviva, blamed last week's collapse in the group's share price on a "complete misunderstanding of ... the nature of the numbers", and said the insurer might complain to the FSA.

The FSA banned short selling on financial stocks in September because it was seen as a possible cause of the plummeting bank share prices that were undermining the UK financial system. But the ban was repealed on 16 January.

With insurers expected to have to take writedowns on the values of their investments, many are expected to turn to the market to raise equity in the coming months.

The climate for insurers is not improving. Yesterday, Exchange Insurance, which specialises in bonds to replace cash deposits on off-plan property development deals, became the first "live" insurer to go into administration since 2001. Begbies Traynor has been appointed as administrator.