New analysis of industry data by ETF provider GraniteShares reveals the number of net short positions reported to the Financial Conduct Authority in January and February this year was down by around 12 per cent when compared to the same period last year. However, in the first half of this month, there were 40 per cent more net short positions reported to the FCA than the same period last March.GraniteShares says the initial stock market falls from the outbreak of Coronavirus would normally have encouraged the shorting of stocks, but the lack of any visibility around how this crisis would evolve had the reverse effect.
As investors developed a better understanding of the scale of the problem and the issues that lie ahead, our analysis suggests that a growing number believe there are some attractive opportunities to short specific stocks, and this helps explain why more net short positions were reported to the FCA during the first half of March than the same period last year.
The EU Short Selling Regulation (SSR) requires investors who hold net short positions of a certain size in financial instruments, including shares, to notify competent authorities – in the UK this is the FCA.
GraniteShares analysis (1) of FCA data – which it says is just one barometer of the level of shorting stocks in the UK – reveals that in January and February 2019 there were 906 and 865 short positions respectively reported to the FCA. The corresponding figures for the first two months of this year were 719 and 833 respectively, which is a decline of 219 or 12 per cent. Between 1-15 March 2019, there were 507 short positions reported to the FCA, but for the period 2-16 March 2020, the corresponding figure is 712 – a rise of 40 per cent.
GraniteShares research also found that the number of net short positions of 1 per cent or more reported to the FCA in January and February this year was around the same as the first two months of 2019. However, for the first half of this month (March) the number was 43 per cent higher than the same period last year.
Will Rhind, Founder and CEO at GraniteShares, says: “The Coronavirus has led to huge volatility in the world’s stock markets with billions of Dollars being quickly wiped off valuations. The data would appear to show that initially investors were initially taken by surprise and therefore not able to hedge portfolios in a way that might be expected. However, it reveals a pick-up in shorting activity in early March as investors realised the potential impact of the virus on economic activity.
“On a daily basis, there is an update of the human tragedy of this virus, and understandably this has spooked investors, including the more sophisticated ones who look to hedge risk by shorting stocks.”
In November last year, GraniteShares launched a range of short and leveraged single stock daily Exchange Traded Products (ETPs) on the London Stock Exchange, enabling for the first-time sophisticated investors to take positions on both rising and falling share prices. In addition to this, they can also be used to hedge individual stock exposures, including those in index or fund holdings.
By providing transparent access through an ETP, GraniteShares is removing the barriers that sophisticated investors face if they want to use leverage.
GraniteShares 11 FTSE 100 single stock 3x short ETPs delivered an average return of 39.5 per cent between the market close on Friday 21 February and Friday 28 February 2020. During this period the FTSE 100 endured a fall of 11.12 per cent, largely due to global concerns around the impact of the Coronavirus.
The best performing GraniteShares inverse ETP was Barclays, which delivered a return of 52.3 per cent between close of business on 21 and 28 February 2020 against the share price falling by 17.2 per cent. The second best performing GraniteShares inverse ETP was Rio Tinto, which delivered a return of 51.6 per cent, followed by Glencore, with a return of 50.9 per cent. The ETP with the lowest return was Rolls-Royce, which despite the strong bounce on the back of its results announcement on 21 February still delivered 10.5 per cent over the week.