Short Sellers’ Futile Year Gets Worse in Europe on Brexit Tumult

Brexit Winners and Losers in Equities
  • Most-shorted stocks fall less, even with worst slump since ’08
  • Swatch, Ocado and Carillion are the most bet-against

The U.K.’s decision to leave the European Union spurred the biggest selloff in the region’s stocks since 2008 -- a goldmine for shorts, right? Not exactly.

QuickTake Short Selling

Among companies with a lot of bearish bets in the Stoxx Europe 600 Index, the ones in the top 10 percent fell 5.6 percent from June 23 through Tuesday, compared with an 8.6 percent decline for the benchmark gauge, according to data compiled by Markit Ltd. Poorly chosen targets have been a problem all year for shorts, with their favorites actually beating the broader market by about 2 percentage points in 2016, the research firm found.

Nor did bears feast in the days prior to the U.K. referendum. Before the vote, short interest for companies on the European index stood roughly where it has all year -- at an average 2.5 percent. While polls in the weeks before the vote showed the outcome was too close to call, bookmaker odds pointed to a higher probability the nation would remain in the EU.

“Short sellers weren’t positioned to benefit from Brexit, and they haven’t added to their positions on average since the vote,” Simon Colvin, an analyst at Markit, said in a phone interview from London. “These are very volatile times where there could be as much upside as downside depending on how things play out. Until we get more clarity, you’re probably not going to see a massive surge in short interest.”

How little did Brexit factor into bearish strategies? Consider that the 10 most-shorted stocks in the Stoxx 600 are the same now as they were when the year began. Investors are most bearish on Swatch Group AG, with its short interest at 26 percent of shares outstanding, followed by U.K. retailer Ocado Group Plc and construction company Carillion Plc, both at 19 percent, according to Markit data. While the two British stocks fell more than the Stoxx 600 since June 23, the Swiss watch maker dropped only 4.4 percent.

Obviously, short sellers weren’t the only ones who were caught off guard. The Stoxx 600 rallied 7.8 percent in the five days before the referendum as speculation mounted that Britain would choose to remain in the EU. The index then plunged 7 percent on June 24, the most since 2008. As of Thursday, the gauge was down 6.1 percent since the vote.

Volatility traders also didn’t profit as much as they probably hoped for, according to Michael Shaoul, chief executive officer of Marketfield Asset Management in New York. Volume of CBOE Volatility Index futures surged 40 percent in the four days leading up to the U.K. vote, but the VIX didn’t rally as much as expected in the aftermath as investors rushed to unwind their long positions. The measure of stock swings fell for three days.

“People bought VIX simply because it worked in the past,” Shaoul said. “It didn’t give you the protection you expected this time, so it’s a black eye in terms of a way of hedging. One never knows what participants will do next time, but my guess is they will be a little bit more inclined to short outright or buy puts for downside protection.”

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