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A $15bn New York investment company has used anonymous offshore companies to profit from some of the largest short-selling attacks in Europe over the past three years, including the unravelling of the UK company Quindell.

A Financial Times investigation can reveal that Tiger Global, which runs one of the world’s largest hedge funds, has used Cayman Islands based shell companies to make large bets against at least 12 European companies since 2012.

Tiger Global’s $6.5bn hedge fund is the mystery investor that used an entity called Roble SL to bet that Quindell’s share price would fall. The company, which is listed on Aim, London’s junior market, saw its share price collapse after being targeted in one of the highest profile short selling campaigns in UK history. This week Quindell’s chairman resigned from the company and its share price fell to an all-time low.

Tiger Global’s extensive use of anonymous offshore companies raises doubts about the effectiveness of new European rules aimed at forcing disclosure of those who make big bets against the shares of a company.

The rules were adopted in 2012 following a backlash against anonymous traders who profited from falling bank share prices during the financial crisis. They require investors, including hedge funds, to disclose any net short position making up more than 0.2 per cent of a company’s share capital to national regulators. Any net short position above 0.5 per cent must be made public to the market.

“The purpose of the short selling disclose rules was to increase transparency and consistency across Europe,” says Michael Raffan, regulatory partner at Freshfields. “The use of artificial structures to avoid disclosure is against the spirit of the rules.”

Since the rules were introduced, Tiger Global has used four Cayman Islands registered companies to declare its short positions. It is not against the European rules to use a subsidiary but most other hedge funds use their own names.

Tiger Global’s other European moves have included a $200m bet against Nokia, the Finnish telecoms group, as well as short positions in HMV, the UK retailer, ahead of its bankruptcy. They also bet against Blinkx, a London-listed online video company whose shares plunged after a Harvard university professor published a report attacking its internet traffic figures last year.

Tiger Global, which declined to comment for this article, is one of the largest yet lowest profile hedge funds in the world, guarding the identities of its short positions so closely it does not disclose them in its letters to investors.

It was founded by Charles “Chase” Coleman, a protégé of Julian Robertson. Mr Robertson, pictured, was one of the most successful hedge fund managers with his Tiger Management fund before retiring at the turn of the millennium.

Several European regulators told the Financial Times that they did not know Tiger Global was behind the short positions in their jurisdictions. The disclosures were made using only the names of the Cayman holding companies and the contact details of its European lawyers, Simmons & Simmons. The law firm declined to comment.

The European Securities and Markets Authority, the body that worked on the technical aspects of the short selling rules, said: “The rules are there to be enforced by national European regulators”.

The UK’s Financial Conduct Authority said: “The EU position is that there’s no requirement for the beneficial ownership to be disclosed to regulators.”

The UK’s FCA was inundated with requests for information about the identity of Roble SL from investors after the entity took out the largest short position against Quindell, but said it could not comment on whether it did or did not have information.

Q&A on short selling

Dan McCrum and Miles Johnson explain how betting against a security works, with an eye on Tiger Global.

What is short selling?
Simply put, it is placing bets that the price of a security, commonly a stock, will fall.

How do you short?
Let’s say a hedge fund wants to sell short Vodafone. The trader borrows stock in the telecoms operator from someone who owns it, a pension fund for example, and sells it in the market. The hedge fund then hopes that the Vodafone share price will fall before they must buy back the stock and deliver replacement shares to the original owner, pocketing the difference.

Derivatives, such as options or contracts for difference, could also be used to place bets that the Vodafone share price will fall.

Why would a pension fund lend its stock to a short seller?
The short seller must pay any dividends due, and also pays a fee for borrowing the stock, like interest on a cash loan. Such lending is a way for long-term investors, as well as managers of index funds and exchange traded funds, to earn additional income. Fees can be steep when there is little stock available to borrow.

The prime broking divisions of banks are at the heart of the process. They find stock for hedge funds to borrow, lend them securities to trade with, and help structure options trades.

What are the risks?
Getting the bet wrong can be expensive if the shares move in the wrong direction. A short squeeze occurs when many short sellers want to close out losing trades at once, pushing up the price as they are forced to buy. In 2008 VW was briefly the most valuable company in the world after Porsche disclosed that it had acquired 74 per cent of the voting stock of its fellow carmaker, causing short sellers to scramble to cover their positions.

What is short interest?
It is the amount of stock that has been borrowed to sell short, normally expressed as a percentage of the company’s market capitalisation. Another key number to watch is the proportion of stock available to borrow that has been taken up.

When do short positions have to be disclosed?
Under European Union rules enacted after the financial crisis, investors must inform national regulators when they amass a net short position worth more than 0.2 per cent of a company. If the position exceeds 0.5 per cent, the regulator then makes the information public.

Why would short sellers want to be anonymous?
Some hedge funds prize secrecy for its own sake, and prominent short sellers are an easy target for managers of a company under pressure. There are also commercial reasons to avoid disclosure. Disclosure by a well known investor of a short position will attract attention, which could make it harder to borrow the shares needed to establish a large short position as others try to do the same. The cost of borrowing the shares also rises when many investors want to make the same bet.

How did Tiger Global keep its identity hidden?
Tiger Global used companies registered in the Cayman Islands to make its short selling trades in Europe, a practice that is permitted by European regulation but that allowed it to work anonymously. When the hedge fund built up a short position above the declarable threshold only the name of the Cayman shell company was made public, not the name of the beneficial entity behind the trade.


Letter in response to this article:

Why did regulators not use Cayman law to identify short seller? / From Avinash Persaud

Copyright The Financial Times Limited 2017. All rights reserved.
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