Hedge funds score R1.5bn
TWO hedge funds based in the US and the UK pocketed at least à98.7-million (about R1.5-billion) from taking short positions in Steinhoff International in 2017, profiting from the collapse in the retailer’s share price in December amid news of accounting irregularities.
This provides an idea of the scale of the profits enjoyed by funds that did not buy the retailer’s assurances that investigations by German authorities into accounting irregularities were not serious.
Public filings in Germany, where Steinhoff has its primary listing, and the Netherlands, where it is headquartered, show controversial US hedge fund Och-Ziff Management held a small short position in Steinhoff as far back as March 2016, while the retailer still enjoyed a healthy market capitalisation of à23.7-billion.
An Och-Ziff employee is being prosecuted in the US for allegedly bribing officials in several African countries.
The month before Och-Ziff shorted Steinhoff, Germany’s Manager Magazin publication expanded on a December 2015 story in the Handelsblatt about tax authorities raiding Steinhoff’s headquarters on suspicion of accounting fraud, adding information about a power struggle between Steinhoff and a joint venture partner over subsidiary Conforama.
Christo Wiese, Steinhoff’s former chairman, initially dismissed the allegations as nonsense at the time. He has since resigned.
But it appears some market participants did not buy it, as Och-Ziff increased its short position and was later joined by other hedge funds, such as the UK’s TCI Fund Management, which disclosed its short position to authorities in the Netherlands.
Och-Ziff’s position no longer appears in Germany’s public registry of short positions, meaning it has either covered its entire position or has fallen below the reporting threshold.
If it has covered its entire position, OchZiff would have made à94.5-million in profit, the result of a 95% decline in the Steinhoff share from the date of its last reported position to the share’s lowest point.
Och-Ziff declined to comment on its trades.
TCI offloaded its earlier short position between November and December, resulting in just a 75% profit of à4.2-million. Other data sources show that just less than 5% of Steinhoff was shorted on the Deutsche Börse, while between 15% and 20% of the retailer’s shares were lent to short-sellers on the JSE.
TCI did not respond to requests for comment.
Assuming short-sellers in both Germany and SA took their positions on November 15 at à5.60 and R52.17 per share, respectively, they would have grossed just more than à1-billion in Germany and between R30.1-billion and R40.2-billion in SA, based on price declines of up to 95%.
Unlike markets falling under the ambit of the European Securities and Markets Authority – such as the Netherlands and Germany – the JSE does not have a public registry of short positions in shares.
“Accurate short data is extremely hard to find,” said Jean-Pierre Verster, portfolio manager at Fairtree Capital, who also shorted Steinhoff on behalf of his funds.
TCI – founded by Sir Chris Hohn, who was knighted for his services to philanthropy – raked in $273.3-million in pretax profits during its last financial year, most of which, together with capital in reserve, was paid out as a $323.8-million dividend to investors. These include the Children’s Investment Fund Foundation, a philanthropic organisation aimed working in developing countries. Hohn serves as one of its trustees.