The FTSE's Most Shorted Stocks

Still, there are always opportunities – and there’s a short-selling battle currently playing out live in the global media. Hindenburg Research, a US firm that analyses companies on the look out for anomalies, dodgy accounting and fraud, has taken on one of India’s richest men, Gautum Adani, who owns a sprawling business empire.

So far it’s 1-0 to Hindeburg, as Mumbia-listed Adani Enterprises has lost over 55% in value so far this year. A war of words is ongoing between the two sides. My colleague Sarah Dowling has covered the story in more detail.

Back in the UK, let’s revisit the Financial Conduct Authority’s daily list of most-shorted stocks, which we last looked at in November 2022. It shows what professional investors think about particular sectors, and sometimes gives an early warning sign of trouble.

Darktrace Difficulty

Looking back, it’s clear how market sentiment has shifted in just a few months.

In November, many of the shares on the top 10 most-shorted list were nursing hefty year-to-date falls, the most significant being Naked Wines (WINE), down 82% in early November.

Every single stock then was down sharply in 2022. Now the table looks very different. While 2023 is only six weeks young, the year-to-date gains are notable: the biggest being ASOS (ASC) with a 55% rise. In the 10-strong list, only Direct Line (DLG) is nursing a double-digit loss so far this year. The reasons seem obvious: it’s axed its dividend, issued a profit warning, and seen the CEO depart.

Elsewhere, it’s a list of plus signs, with eight out of 10 stocks in the black this year. For context, though, we’ve included the one-year performance figures, which are less impressive. Net short positions have also fallen since November too: to get into the top 10 most you'd need more than 5% of stock shorted, now that's fallen to 3.5%. The most shorted stock three months ago - Boohoo (9.55%) - has been ousted by ITM Power, which has just over 6% of its shares shorted.

ITM Power is a green startup that makes hydrogen equipment such as electrolysers. It's issued a number of profit warnings, unveiled an increase in net losses and embarked on a cost-cutting programme.

Of the companies in the top 10 in November, the following are still among the most shorted in February: Abrdn, Boohoo, Asos, Kingfisher, Naked Wines. Abrdn is an interesting case - its shares fell sharply for much of 2022, but started to stage a recovery in October as markets regained their risk appetite. Shares in the asset manager are up 20% in the last six months and nearly 11% this year.

Stocks that Morningstar analysts cover are Kingfisher, Asos and Direct Line - all of which are considered to be trading below their fair values.

As well as showing the most shorted stocks, the FCA’s list also gives an insight into recent short positions. Cybersecurity firm Darktrace (DARK) is one of the stocks currently being targeted by short sellers. This follows a report by New York firm Quintessential Capital, which claims Darktrace had inflated its revenues; the company itself denies this.

Nevertheless, the shares are off 7% this year, below its IPO price, and are down 31% on this time last year. The FCA register shows that hedge fund Marshall Wace took out a 1.15% short position on 8 February.

Short Selling Reforms

The FCA's list is useful to journalists and investors because it shines a light on a misunderstood corner of public markets. But could the list be in jeopardy?

The government has launched a review into short selling, and, as part of this wider dismantling of EU laws on financial services, the public list could go. A ban on "naked short selling" – selling shares without borrowing them – is also in scope for a repeal.

The backdrop is also complicated by Brexit. Chancellor Jeremy Hunt is keen to launch the City of London's "big bang 2.0", a reference to the sweeping wave of deregulation that changed the Square Mile in the 1980s.

Depending on who you talk to, this was either a period of creative destruction that made London the number one financial centre in the world – or unleashed "animal spirits" of risk taking that led us towards the banking crash in 2008-2009.

How Does Shorting Work?

Short selling can be a highly-profitable way to exploit the falling share price of companies in distress. It involves selling shares you don’t own to make a profit from the fall in the price.

To do this, you borrow them from specialist firms like brokers, sell them at the current market price with the hope of buying them back at a cheaper price later. This active trading strategy is usually only undertaken by professional investors, but often provides an early warning sign of problems ahead that can be picked up on by all.

Firms that have attracted short sellers in the past include Thomas Cook and Carillion in the UK, and the scandal-hit Wirecard in Germany. Shorting tends to attract other shorters, however, and some argue it only hastens the demise of a company. Sometimes a company on a shorting list may have terminal problems; other times it’s just a temporary loss of confidence prior to a turnaround, or a buyout, which takes the company off the market.

To an outsider, short sellers may seem like shadowy figures in the investment industry. But alongside specialist trading firms and hedge funds, some of the biggest asset managers are involved in shorting, including BlackRock, Jupiter and JP Morgan.

Often short positions can be taken out to cover "long" positions as part of everyday risk management, where fund managers are managing their significant stakes in companies. Other familiar names on the FCA’s list include Marshall Wace, Citadel Advisors, and GLG Partners.

In 2021, the regulator changed the rules for declaring short positions, effectively lowering the bar for transparency.

Investors now need to notify the FCA when their position in a company exceeds 0.1% of its issued share capital (previously the threshold was 0.2%). Short sellers must also notify the FCA every day about who they are shorting and the size of the short position.