Hedge funds up bets against Italy's Monte Paschi

Hedge funds up bets against Italy’s Monte Paschi

LONDON (Reuters) – Big-name London hedge funds Odey Asset Management and Egerton Capital are among those upping their bets against Monte dei Paschi di Siena in recent days, after revelations the troubled Italian bank faces heavy losses.

Italy’s third-biggest bank is under investigation for an opaque series of derivatives and structured finance contracts between 2007 and 2009 that could cost it 720 million euros. The scandal surrounding the world’s oldest bank, which is already in need of a 3.9 billion euro ($ 5.34 billion) state bailout, has become a campaign issue three weeks before Italy holds national elections.

Shares in the Monte Paschi are now the most in demand in Italy’s FTSE MIB <.ftmib> blue-chip index for short-selling by hedge funds, with 75 percent of those of its shares available to borrow – the “lending pool” supplied by institutional investors – now out on loan, according to data group Markit.</.ftmib>

That so-called utilization rate for short-selling – selling borrowed stocks in the hope the share price will fall so they can be bought back more cheaply – has picked up sharply from below 52 percent on January 23.

Prime brokers, who provide finance and lend stock to hedge funds, have had to meet some of the demand for shares in the 540-year-old Tuscan lender from their own supplies, such has been the interest from short-sellers. France’s Peugeot , one of the carmakers hardest hit by the industry’s tumbling sales in Europe, is in the same boat.

Egerton, based in London’s upmarket Mayfair district, has been aggressively increasing its short bet. It took a short position of 0.68 percent of Monte Paschi on January 24, according to the website of Italian regulator Consob, and had increased this to 0.97 percent by Friday.

Meanwhile Odey, headed by high-profile manager Crispin Odey, also took a position of 0.57 percent on January 24.

Boston-based Wellington Management Company, meanwhile, has held a short position since before the bank’s complex and loss-making derivatives transactions came to light late last month, but increased its position to 0.7 percent on January 23.

Egerton Capital and Wellington declined to comment. Odey did not respond to requests for comment.

Short interest in Monte Paschi, as measured by utilization, hit a year-high towards the end of last year but fell back sharply in January as its shares rallied.

So far short-sellers’ bets are unlikely to have paid off; though the shares fell heavily at the end of January and lost another 5.9 percent to 0.232 euros on Friday, they made gains earlier in January so are still slightly above their closing level at the end of last year.

“This stock has been in short-sellers’ sights for some time,” said Alex Brog, director at Markit. “Up until recently, however, shorts were covering their positions, until the recent revelations.”

(Reporting by Laurence Fletcher; Editing by Will Waterman)