Hedge funds’ bearish mining bets turn sour
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Hedge funds that made big profits betting against mining stocks in 2015 have seen the trade turn sour, as commodity prices have bounced off multiyear lows and triggered a huge rally in the natural resource sector.
Anglo American and Glencore, the two worst-performing stocks on the FTSE 100 last year, have both had their share prices almost double since the beginning of January, as industrial metal prices have gone on a six-week tear.
That has left some bearish wagers placed by high-profile hedge funds down hundreds of millions of dollars since the turn of the year. Short sellers, borrow shares from institutions, sell them into the market and hope to buy them back at a lower price.
Lansdowne Partners, one of the best known funds in London, was short of 227m Glencore shares, according to data from the Financial Conduct Authority. The recent surge in Glencore will have seen the $21bn fund surrender a large chunk of the gains made since it first started betting against the Switzerland-based miner and commodity trader 20 months ago, according to bankers.
Odey Asset Management — founded by Crispin Odey — is also likely to see its position betting against Anglo American take a sizeable hit since January. The $13.4bn fund started amassing its short position over a year ago.
Lansdowne and Odey declined to comment.
Betting against mining stocks last year became a popular way for funds to try to make money out of China’s slowing growth. The world’s second-largest economy has become by far the world’s biggest consumer of industrial metals over the past decade, accounting for about 40 per cent of all copper demand. Anglo American and Glencore were also targeted because of their high debt levels.
Data compiled by the FCA show Lansdowne, Viking Global Investors, Passport Capital and Steadfast Capital Management hold a short position in Glencore equivalent to four per cent of its entire share capital.
While Viking, Passport and Steadfast have reduced their position against the company in recent weeks, the data shows, Lansdowne has held fast or even increased its short position, suggesting it may be prepared to weather more pain in the expectation the commodity rout has further to run.
“This is deeply scary for the shorts,” said one banker. “The fear of insolvency, which was never a reality, has now receded in Anglo and Glencore and institutions aren’t selling. This could be an almighty problem.”
As pessimism about demand in China reached near panic levels in January, discloseable short interest in Anglo American and Glencore reached record levels of more than 5.7 per cent and 5.5 per cent respectively, according to the data. But as only positions above 0.5 per cent of the company’s have to be publicly disclosed, the short position was likely far larger.
Markit, a financial data provider, said 18 per cent of Anglo American’s shares were out on loan as recently as February 23, while more than eight per cent of Glencore’s shares were out on loan in late January.
Funds buying back short positions to return borrowed shares likely contributed to the surge in share prices across the mining sector.
In heavy trading, Glencore’s shares hit 180p on Friday, taking gains since the start of the year to more than 98 per cent. It later fell back to 160p. Anglo American hit 599p, up 99 per cent since January 1.
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