PARIS/LONDON Hedge funds circling the stock of vulnerable companies got an expensive wake-up call this week with Nokia's dramatic exit from commercial purgatory, prompting many to reassess their targets.
Funds that had borrowed Nokia stock to sell on, in a 'short' bet it would fall further, have suffered a potential loss of up to $843 million, Reuters calculations showed, as it jumped up to 49 percent after the once world-beating Finnish tech firm agreed to sell its handset unit to Microsoft for $7.2 billion.
Device manufacturer Blackberry and telecom equipment maker Alcatel-Lucent are also heavily shorted, with 12.8 percent and 5.9 percent of their shares, respectively, out on loan, a proxy for short-selling, data from Markit showed.
But with both potential targets if the tech sector consolidates further, share price rises of 9 percent and 22 percent since the Nokia deal on Monday highlight the uncomfortable position for those with a short position on either stock.
And there are others. IT services firm Atos and semiconductor specialist Infineon both have above average short interest, at 4.8 percent and 4.5 percent, respectively, while also joining investment bank Citi's list of potential deal targets.
"The Nokia deal is like a wake-up call for some hedge fund managers," said Christophe Jaubert, CIO hedge fund strategies at Rothschild HDF Investment Solutions, in Paris.
"It's a healthy reminder that managers need to spread their bets to minimize their risks, instead of taking one big short position."
The scale of Nokia's move higher meant that the rush by many hedge funds to buy back the stock and exit their position - known as a 'short squeeze' - was Europe's biggest since funds were surprised by a 2008 stake-building in Volkwagen by Porsche, which pushed VW up 400 percent.
COMING UP SHORT
The move is yet another nail in the coffin for a short-term strategy that was already sharply underperforming this year.
According to research firm EDHEC-Risk, funds using a 'short' strategy have on average lost 14 percent this year against a gain of 15 percent for the Standard & Poor's 500 index.
"It's been a challenge to find good short ideas, partially because of deals happening in the merger space," Rob Koyfman, Senior Strategist at Lyxor Asset Management, in New York, said.
The risk that companies are saved for strategic reasons, either by a takeover or a buyout, has been rising as concerns about the health of the economy ebb, interest rates start to rise and companies look for acquisitions to fuel growth.
"Identifying takeover targets is more of an art than a science. This is not something you can do by simply running financial screening," he said.
"Shorting Blackberry might not be a good idea in that sense. Even if the fundamentals are deteriorating, there's a risk of a strategic move on the firm. It makes fund managers nervous."
(Additional reporting by Sudip Kar-Gupta; Editing by John Stonestreet)