February 27, 2018 / 12:22 PM / 6 months ago

Hedge funds caught short by Provident Financial squeeze

* Shares up 73 pct after firm bolsters balance sheet

* 14 funds had large short bets at Monday close -FCA

* Lansdowne Partners, Pelham, AQR among most exposed -FCA

* Shares rose by as much as 87.6 percent to 1104 pence

By Simon Jessop and Alasdair Pal

LONDON, Feb 27 (Reuters) - Hedge funds were caught out by a big short in Provident Financial when the British sub-prime lender revealed plans to shore up its balance sheet on Tuesday, triggering a squeeze which drove a near 90 percent spike in its share price.

Provident’s 331 million pound ($462 million) fully underwritten cash-call was smaller than the 500 million pounds some had expected, catching a number of hedge funds on the hop and potentially exposing them to losses on their trades.

At Friday’s close, around 12 million shares in Provident were out on loan, a proxy for demand from hedge funds betting the shares would fall in a so-called short trade, data from Astec Analytics showed.

In a short trade, a fund borrows the stock from a long-term holder such as a pension fund for a fee and then sells it into the market, hoping to buy it back after the price has fallen and return it to its original owner at a profit.

More than two-thirds of the lendable stock in Provident was out on loan on Friday, the Astec Analytics data showed, and based on average daily traded volume, it would have taken just over 10 days for all the hedge funds to exit their positions.

Shares in Provident, which have been hit hard as it struggled to restructure in the face of cash troubles and an investigation by Britain’s financial markets regulator, had fallen more than 80 percent from a 2017 high ahead of Tuesday’s results, with a 16 percent drop on Monday alone.

But with Provident’s stock price turning against them on Tuesday, it was up 73 percent at 1,017 pence at 1216 GMT, many hedge funds scrambled to buy back the shares and close out their positions, fuelling the gains, traders said.

Fourteen funds had short positions in Provident equal or greater than 0.5 percent of its stock at the close of Monday, disclosures to Britain’s Financial Conduct Authority showed.

Among the biggest were those held by Lansdowne Partners, at 2.19 percent; Pelham Global Financials Master Fund, at 1.5 percent; and AQR Capital Management, at 1.58 percent.

Other funds to hold large positions included Altair Investment Management, CZ Capital, Egerton Capital, GLG Partners, GSA Capital Partners, Marshall Wace, Miura Global Management and Worldquant, the FCA data showed.

The amount of money made or lost by each fund will depend on when the trade was put on and how much each paid to borrow the shares, data which is not publicly available. ($1 = 0.7160 pounds)

Reporting by Simon Jessop Editing by Alexander Smith

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