Banking on Bad News

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The big short comes to Germany.
  • Why it matters

    Why it matters

    Short selling of German companies has more than doubled in two years, as speculators are tempted by the country’s liquid, well-developed equity markets.

  • Facts


    • Short selling of shares in major German companies has doubled in the last two years, with the number of companies affected rising from 166 to 234.
    • Large investment funds lend shares to hedge funds for short-selling operations, with fees ranging from 0.1 percent to 4 percent of a share’s current value.
    • A number of well-known companies have large numbers of shares sold short. These include SMA Solar, Lufthansa, Ströer, and Deutsche Bank.
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Pierre-Pascal Urbon has a problem. His company SMA Solar was once a market darling, but investors then lost faith in him as chief executive. With good reason: The Chinese solar market is collapsing and there has been massive downward pressure on the price of SMA’s solar inverters, the electric current converters that translate sunlight into electricity for the grid. And next year looks no better. Since the beginning of 2016, the company’s stock has fallen around 40 percent. All in all, it doesn’t get much worse.

All this has drawn the attention of the market’s troublemakers: Short-sellers, dealing with borrowed shares to make profits when share prices fall. It is often a very profitable business, and with ongoing zero-interest rates, it is a more and more popular one.

Short-selling hedge funds are increasingly looking at German companies. Worldwide, hedge funds hold $7 trillion in capital and loan facilities, said Marcus Storr, hedge fund expert at investment managers Feri. Only a fraction of that goes into short-selling.

Nonetheless, individual transactions can amount to hundreds of millions of euros. According to data from Bafin, the German financial authority, the number of these trades has more than doubled in two years. In 2013, there were around 6,700 transactions, affecting 166 different equities. Two years later, it was 13,550 deals on the shares of 234 companies. All positions involving more than 0.2 percent of tradeable stock must be reported to Bafin.

In Germany, SMA Solar has been particularly badly hit, reveals data from financial services company Markit, seen by Handelsblatt. Almost one third of all shares available in the company are being used to bet on its stock falling further.

Market watchers say this is a crystal-clear vote of no confidence.

The four largest short-sellers are not household names: Public Equity Partners Management, Quentec Asset Management, Coatue Management and Valiant Capital Management. But they can strike fear into the heart of chief executives like Mr. Urbon, because of their ability to put pressure on prices, and to put executives’ jobs at risk.

“British and American market actors increasingly regard Germany as a playground for euro-denominated transactions.”

Kai Tschöke, Senior manager, Rothschild

During the financial crisis, short-selling developed a bad reputation. Bafin temporarily banned short sales using borrowed shares from 11 key financial institutions, including Deutsche Bank and Allianz. They said it was to prevent destabilization of the companies and of the market in general. But financial professionals think a general ban would be excessive.

In 80 percent of cases, there is a “company-specific reason” for short sales, said Ebrahim Attarzadeh, a partner in the financial firm Mainfirst. This might be a structural problem in the company, or weak management. Private investors should take care with heavily “shorted” shares, he said. But on the other hand, a share can shoot up in value if short-sellers start getting rid of their positions.

31.2 percent of SMA Solar free-float shares are now sold short. Other companies have a similar proportion: these include airport operator Fraport, media company Ströer and fertilizer maker K+S. Lufthansa and trading conglomerate Metro have also been affected by the trend. Just how much money shorters make on deals is a well-guarded secret. But George Soros is thought to have made millions shorting Deutsche Bank at the end of June.

British and American market players increasingly regard Germany as a “playground for euro-denominated transactions,” said Kai Tschöke, a senior manager with the German branch of the investment firm Rothschild. Their influence was stronger than previously, he added, now that foreigners hold more than 50 percent of shares in the 30 leading firms making up the DAX, Germany’s leading stock market index. These equities are very widely traded, offering considerable market liquidity, he said. Even very large transactions are easily carried out: “There are many financial instruments to implement whatever strategy is wanted,” he said.

Ingo Speich, a fund manager with Union Investment, agreed about the increase in overseas short-selling. “In Europe, there are a large number of hedge funds in London above all: they are very well networked and exchange shares between each other.”

The initial lenders of shares are often large investment funds like Fidelity, Allianz Global Investors and Blackrock, say insiders. The loan fees they charge have “become a very stable revenue stream,” said Mr. Attarzadeh of Mainfirst. As a rule of thumb, shares in companies on the DAX or MDAX indices can bring in 0.1 to 0.25 percent of the share price. “But in extreme or unusual situations, the fees can reach 2 to 4 percent,” he added.

Hedge funds are not naïve investors. Their managers always have their own money invested in the funds, and thus “tend to exercise caution, so as not to lose their own or their clients’ money,” explained Mr. Storr from Feri investment managers. Short selling is also a labor intensive business, he added, beginning with “fundamental analysis of all available data available on the company.” Expert opinion and predictions are widely sought.

Some emphasize the darker side to the trade. While acknowledging that short-selling as a normal part of the market, Mr. Speich criticized the actions of speculators. “They have been known to deliberately spread information on companies, taking up short positions in order to manipulate market prices to their advantage,” he said.

Many hedge funds, as well as other investment funds, use computer technology to buy and sell shares simultaneously, looking to profit on marginal share price differentials.

This can lead to tension between short-sellers and company executives. Early this year, a controversial report from hedge fund Muddy Waters led to a collapse in the share price of media and advertising company Ströer. After Ströer issued a 16-page refutation, Muddy Waters founder Carson Block hit back. “Ströer’s management does not deserve investors’ trust,” he said, claiming investors had been misled.

Muddy Waters made similar charges against French trading giant Casino, and against the Hong Kong commodities firm Noble Group. Today, Muddy Waters is not even among Ströer’s biggest short sellers: Blue Ridge Capital, Third Point and Lansdowne Partners are all now even more heavily invested in a fall in Ströer shares.

Activists are not the only short-sellers to make life difficult for senior management. Many hedge funds, as well as other investment funds, use computer technology to buy and sell shares simultaneously, looking to profit on marginal share price differentials, explained Mr. Storr. Among hedge funds, Marshall Wace is particularly well-known for these algorithmic investments, thought to amount to $10 billion. The fund is well-known among senior German executives: it currently invests almost €850 million in short-selling 16 German companies, including Lufthansa, Deutsche Bank, and Metro. In spite of the large sums involved, the hedge fund has said that it has “no particular view on Germany or individual German firms.”


Robert Landgraf is Handelsblatt’s chief correspondent for the financial markets. Peter Köhler covers finance and banking from Frankfurt. To contact the authors:,

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