A small group of patient hedge funds betting against PSA Peugeot Citroen finally got the chance to benefit from their gamble on Monday when the French car maker's stock lost a tenth of its value.
But others felt Peugeot, which has been hit by a collapse in continental European car sales, remains too risky for short selling as its stock had more than doubled since the start of 2013 until Monday's sharp drop.
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A number of hedge funds have dropped their bets on future falls in Peugeot stock, closing their short positions after hopes of a turnaround at the group and speculation about the arrival of new investors prompted a strong rally in July.
That left a group, including Odey Asset Management, holding on in the hope that the rally would reverse.
That happened on Monday when Peugeot fell to a 5-1/2 week low. This followed a Reuters report that Peugeot was preparing a 3 billion euro ($4.1 billion) capital increase in which Chinese partner Dongfeng Motor <0489.HK> and the French state would take matching stakes in the group.
Some investors fear the French state's possible presence as a shareholder would make Peugeot harder to manage, and slow its drive to cut jobs and plant capacity after a six-year sales slump, prompting Monday's sell-off.
Takis Christodoulopoulos, an analyst at hedge fund Toscafund, remained negative on the prospects for Peugeot which is rapidly running down its cash reserves due to heavy losses.
"What bothers me is the way in which they are burning through cash," he said, adding he preferred French rival Renault even though Renault's 60 percent share price rise this year has underperformed Peugeot's.
"I'm not at all positive on Peugeot, but Renault seems to be doing much better with their brand," he said.
Such expectations argue the case for short sellers, who borrow a security and then sell it, betting they can buy it back later at a lower price and return it to the lender, bagging the difference.
HEDGE FUNDS BURNT
Earlier this year, Peugeot was among the most shorted stocks across Europe, with short-sellers hoovering up nearly all available shares, betting the carmaker would not survive the collapse in European car sales.
However, the July rally burnt a number of hedge funds who bailed out of their short positions. This sent the level of Peugeot shares on loan to 8 percent now from a peak of 18 percent early this year, according to data from Markit.
London-based Odey Asset Management LLP did the opposite. According to filings with French regulator AMF, it raised its short positions on Peugeot to 2.19 percent of the company's shares last month from 1.55 percent in early August.
According to Reuters calculations, the theoretical gains on the day for Odey AM's short position was around 11 million euros ($14.9 million), and overall, around 41.3 million euros for all the short positions.
Odey Asset Management founder Crispin Odey declined to comment on the situation.
Hedge funds D.E. Shaw, Marshall Wace LLP and Adage Capital Management also held big short positions on Peugeot, with respectively 2 percent, 0.73 percent and 0.60 percent of the company's shares, according to regulatory filings.
Other hedge funds, fearing another painful "short squeeze", warned against shorting Peugeot despite signs of exhaustion in the stock's 3-month rally and the company's failure to boost its sales yet.
JN Financial investment manager Edward Smyth noted possible support for the company from Dongfeng Motor. "I'd feel uncomfortable with 'shorting' it at these levels if there's interest from the Asian side," he said.
Clairinvest fund manager Ion-Marc Valahu has a "long" position to bet on future gains on Peugeot shares, but added he had hedged that position by buying Peugeot bonds which rose on Monday.
"I've bought half in equity and half in bonds. The equity is down today but the bonds are rallying," he said.
(editing by David Stamp)