Hedge funds have raised their bets against financial stocks in the United Kingdom, United States and Germany as a short-selling ban in four euro zone countries prompted them to focus elsewhere for ways to profit from the banking sector's difficulties.
Figures from Data Explorers show stock out on loan — a strong indicator of shorting interest — for financial stocks in the United Kingdom, United States and Germany has risen strongly since Aug. 12, when Spain, Italy, Belgium and France imposed shorting bans on certain financial stocks.
While prime brokers say funds' overall short bets are low after a choppy summer for European stocks, the data nevertheless backs up anecdotal evidence that some managers have been looking for other ways to bet against Europe's banking sector.
Short-selling, a common way for hedge funds to profit from falling share prices, involves borrowing stocks to sell and then aiming to buy them back more cheaply later.
Stock out on loan in Britain's FTSE 350 Financials index has risen 16 percent to 3.02 percent since the ban came in, whereas short interest on the broader FTSE 350 has fallen.
The rise in short interest in U.K. banks also comes ahead of the Independent Commission on Banking's final report on Sept. 12, when it is expected to back its interim proposals that U.K. banks should ring-fence their retail operations from riskier investment banking operations to protect taxpayers from future crises.
In Germany, stock out on loan on the DAX Financials index is up 31 percent to 1.24 percent, while for the wider DAX All Shares index it has barely changed.
In the United States, stock out on loan on the S&P 500 Financials index has jumped 44 percent to 2.75 percent, while for the broader S&P 500 index it is up 16 percent.
"Either you express your view on financials through Germany and the U.K., or you don't do it at all," said a prime broking executive who asked not to be named.
"It (the ban) does increase the pressure on Germany to follow suit to protect its bank stocks."
In contrast, stock out on loan for financial stocks subject to the ban has increased only marginally in Belgium and France since Aug. 12, while in Spain and Italy it has fallen.
Last week Spain, Italy and France extended their short-selling bans, while Belgium, whose curbs have no end date, kept its ban in place.
Since Aug. 12, the STOXX Europe 600 banking index has fallen 19 percent, while the broader European market is down 12 percent.
However, overall short-selling by hedge funds is still not high, and has crept downwards in recent months as managers grow wary of being caught out on the wrong side of trades.
"Big shorts need conviction, and I don't think there's any conviction out there," said one prime broker, who spoke on condition of anonymity.
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