Now hedge funds target asset stripper that bought GKN

HEDGE funds last night cashed in millions of pounds after betting on a fall in the share price of asset-stripper Melrose following its takeover of GKN.

In a twist to the takeover saga, Melrose had become the most shorted stock on the London Stock Exchange.

Hedge funds – including some that had bought shares in British engineer GKN to help force through its sale – had bet that Melrose shares would slump over fears the merger would hammer its ability to make a profit.

On Friday, 24 hours after the GKN deal was approved, 17pc of Melrose stock was held by short-sellers. But on that day, Melrose shares fell 3pc as it raised money from the market to fund the deal. At the same time, the Mail revealed how strict new conditions could prevent the future sale of parts of GKN, which makes components for fighter jets, cars and planes.

Yesterday, a frenzy of activity saw short positions in Melrose drop to 5.6pc. Some of this was because the company had issued new shares, but official data shows that a number of hedge funds that held big positions in the firm also sold out.

It is unclear how much the funds earned from the share price fall, but it will be well into the millions of pounds.

While Melrose bosses plan to hold on to GKN for a few years, as is their usual practice, it is expected that they will then sell it piecemeal for a profit.

The huge bet traders had made against Melrose – equal to around £725m of its value – suggests they were concerned it would struggle to make money out of GKN. Laith Khalaf of investment firm Hargreaves Lansdown said: ‘Some investors think the vision of Melrose wasn’t a good one, so they’re betting against the company making a good fist of it. A lot of the companies involved in the sale were there to make short-term profits wherever they see value.’

Firms betting against Melrose included Elliott, which was short on 2.03pc of the company. It previously controlled 3.8pc of GKN shares – making a crucial difference on the knife-edge vote over whether the sale should go ahead.

Another leading GKN shareholder, Sand Grove Capital Management, had a 2.99pc short bet on Melrose.

Other speculators such as Oxford Asset Management, which was shorting 1.3pc of shares, were not involved in the GKN deal and appeared to simply be betting that Melrose’s plans will go wrong.

Melrose shares fell 2pc, or 4.7p, to 224.5p last night.