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Hedge Funds Are Placing Record Bets That Danish Stocks Will Fall

Updated on
  • Hedge funds only target very specific Danish stocks, ABG says
  • Short interest is rising as hedge funds have more money

Hedge funds have placed record bets that Danish stocks are set to decline, in a development that has local investors sitting up and paying attention.

Perhaps surprisingly, it’s a trend that Denmark’s financial watchdog says it welcomes.

The value of Danish stocks being shorted has more than tripled in the past five years, according to data from the Financial Supervisory Authority in Copenhagen. Though the regulator banned short bets against Danish banks during the financial crisis, it now regards such speculation as healthy.

Shorting Denmark

A growing number of hedge funds are betting against Danish stocks

Source: Danish FSA

AQR Capital Management LLC is one of the most active hedge funds betting against Danish shares. In the past year, it has held short positions in Genmab A/S, Novozymes A/S, Pandora A/S and Vestas Wind Systems A/S, according to the FSA.

Coatue Management LLC has one of the biggest short positions in a single Danish stock, with 1.82 percent of Pandora’s share capital, according to the FSA.

“We’re generally positive on short selling,” Anders Balling, head of the capital markets division at the Danish FSA, said by phone. “Short positions are good for a well-functioning stock market. It makes the pricing more accurate and it also adds liquidity.”

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Short trading is rising as Danish stocks outperform the European benchmark gauge. In the five years through 2017, the main Danish share index doubled in value while the Stoxx Europe 600 Index added about 40 percent.

“We don’t believe there’s a general mistrust in the Danish stock market because it’s mostly very specific shares that become targets for short sellers,” Anne Sophie Riis, who works at the equity sales desk at ABG Sundal Collier in Copenhagen, said by phone.

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Hedge funds have been on the winning side of bets against jewelry maker Pandora, vaccine developer Bavarian Nordic A/S and cable producer NKT A/S, Riis said. “The rest of the market is looking closely at what short sellers do and in some cases, the movements can affect the share price and the sentiment around a company,” she said.

On Friday alone, two funds (WorldQuant LLC and Numeric Investors LLC) raised their bets against NKT. The stock is now Denmark’s most shorted in percentage terms, with positions equivalent to more than 14 percent of the shares, according to IHS Markit.

The development in Denmark is part of a global trend, according to Ihor Dusaniwsky, who’s in charge of the Predictive Analytics division at New York-based S3 Partners LLC, where he analyzes short positions.

“Short interest worldwide has increased significantly over the past several years mainly due to the growth of alternative investing vehicles, mainly in hedge funds,” Dusaniwsky said in an emailed reply to questions. “Hedge funds’ assets under advisement have more than tripled since the end of 2011 and the constant search for Alpha has greatly expanded the universe of securities and countries that they invest in.”

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Balling at the FSA says the sudden rise in short interest in Danish stocks has turned the development into “a bigger part of the public discussion in Denmark.”

Top Five

The most shorted stocks in Copenhagen's benchmark index

Source: S3 Partners LLC

Under European Union rules, hedge funds must report to the FSA if they hold a short position equal to 0.2 percent or more of a company’s share capital. When they hold 0.5 percent or more, the FSA publishes the position on its website.

“We can register that an increasing number of people are using our database to search for short positions and we also get a lot of approaches from people who want to know more,” Balling said. “We’re using more resources on providing transparency on short-selling, because the market is expressing a very clear demand.”

— With assistance by Nick Rigillo

(Adds details on hedge funds.)
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