Shorts stuff

Metro Bank went into today’s AGM having taken fire for both its financial reporting and due to an ill-advised business relationship between the firm and a company run by the chair Vernon Hill’s wife. It’s also a heavily shorted stock. Just based on public disclosures (which only include shorts above 0.5%) the short position is over 10%. In practice it is likely to be significantly higher.
What’s striking about shorting these days is the involvement of more traditional institutional investors, alongside the hedge funds. For example, shorts in Metro Bank include both Odey, with 3.83%, and Artemis Investment Management, with 0.87%. Or if we look at the largest current short positions in UK stocks included in the top 20 are BlackRock Investment Management UK, Henderson Global Investors, Merian Global Investors (formerly Old Mutual) and the Canada Pension Plan Investment Board. All over these positions are over 2.5%, which suggests something other than hedging.
Does it matter? On the face of it, there is no reason why traditional institutions should not participate. Presumably they think they have the requisite skills to pull off this kind of trading, and their clients (or beneficiaries) know that this is happening. But it does rather change the profile of investors who are typically considered long-term ‘owners’ of companies.
A less remarked upon aspect of the increasing use of short positions by large institutions is how this might change the dynamics of stewardship activity. To take one example, BlackRock Investment Management UK has a short position of well over 5% in AA PLC, one of the largest positions any investor has in any UK stock currently. But it will also have long index holdings in the stock. Netted out, BlackRock’s position will be short overall, perhaps a couple of percent.
How should it engage with AA PLC in this scenario, if at all? The incentives seem to point towards inaction, or superficial engagement, since an improvement in value means the large short position starts to hurt. But not acting, or not acting effectively, doesn’t seem to be serving the interests of clients with a long exposure. (As an aside BlackRock Investment Management UK also appears to manage money for the AA PLC pension scheme!)
These are not straightforward issues, and there may well be reasonable ways for investors to manage, or explain, how they deal with these potential conflicts. But there are some issues here that deserve further scrutiny (another being where the stock that is being used to short is coming from). In an era where stewardship is now the subject of regulatory scrutiny it feels like the right time to dig a bit further down.

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