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There\u2019s no two ways about it. For American investors, the U.K. stock market hasn\u2019t exactly been the place to be, with underperforming indices and a troubling dearth of new listings in the last few years.\u00a0<\/p>\n
There are reasons for that, from lower liquidity to the country\u2019s relative inability to scale tech companies. But it\u2019s possible to take Britain-bashing too far, as some Wall Street bears are discovering.\u00a0<\/p>\n
According to information obtained by the Financial Times<\/em><\/a>, <\/em>some of the world\u2019s biggest hedge funds have been caught off guard by sudden valuation increases in British stocks they bet would fail.\u00a0<\/p>\n Shorting involves borrowing a stock to sell in the market then buying it back before a deadline in the hope its value has fallen.<\/p>\n In recent years, the U.K. stock market has appeared to be a fertile hunting ground for short sellers. British stocks have lagged U.S. peers, partly because the latter have benefited more from the recent AI boom.<\/p>\n Shares in the S&P 500 have jumped close to 24% in the last 12 months, while the FTSE 100 is up just over 8%.<\/p>\n Commentators have also decried the London Stock Exchange for its lack of liquidity, with several major companies, including travel company Tui<\/a>, delisting or avoiding IPOing in London and opting instead for other exchanges. Public listings have dropped 25%<\/a> in the last 10 years, as exits have exceeded new flotations.<\/p>\n Data from S&P Global Market Intelligence, viewed by the FT,<\/em> shows some major U.K. companies, including BT, Abrdn, and Ocado, are attracting significant short interest.\u00a0<\/p>\n Abrdn shares are down more than 10% in the year to date, while shares in Ocado are down more than 50%, fueling speculation that they could fall further.\u00a0<\/p>\n But the paper reports that it\u2019s other companies\u2014namely those that have been M&A targets, particularly in the mid-cap range\u2014that have burnt hedge funds like Millennium, Gerson Lehrman Group, and Gladstone Capital Management.<\/p>\n The underperformance of U.K. stocks has made an awkward tightrope for investors to walk.\u00a0<\/p>\n While low and falling valuations have offered opportunities for short sellers, bargain-hunting companies<\/a> are increasingly eyeing their own opportunities to acquire those U.K. firms on the cheap.<\/p>\n Groups including Darktrace and Hargreaves Lansdown have been the subject of takeover bids in recent months, sending their valuations soaring and leaving short-selling hedge funds on the ground.<\/p>\n The FT <\/em>reports those offers have been particularly damaging for Millennium, GLG, and Gladstone.<\/p>\n For hedge fund investors who avoided the rush to U.K. mid-cap firms, the move has never made much sense.<\/p>\n \u201cShorting any U.K. mid-cap is insane, literally insane,\u201d an unnamed hedge fund executive told the FT<\/em>.<\/p>\n He explained the relatively small size of most U.K. stocks meant the risk-reward balance was highly unlikely to pay off.<\/p>\n \u201cYour sell case has to be unbelievably compelling and feature the stock going down at least 50%.\u201d<\/p>\n The report is possibly a sign that London\u2019s stock market isn\u2019t quite in the crisis it may have appeared to be in. Chinese fast-fashion group Shein<\/a> is also set to IPO on the London Stock Exchange which could value the group at \u00a350 billion ($63.7 billion), in another shot in the arm for the beleaguered exchange.<\/p>\n<\/div>\nIs London back?<\/strong><\/h2>\n
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