Hedge funds seen circling struggling Gartmore

LONDON (Reuters) - Hedge funds are likely sizing up crisis-hit fund firm Gartmore GRTR.L to short-sell its stock after the departure of another key manager, a sign the company's troubles may worsen as it looks for a buyer.

Gartmore said on Nov 8. it was seeking talks that could lead to a merger or sale after star manager Roger Guy, responsible for about 17 percent of its assets, and CIO Dominic Rossi became the latest senior staff to leave.

The volume of Gartmore shares out on loan, a strong sign of shorting interest, had risen fourfold to 2.25 percent on Friday from 0.49 percent on the day Gartmore effectively put itself up for sale, according to figures from Data Explorers.

That was the highest volume of shares on loan since Gartmore floated on the stock market in December 2009.

Short-sellers pay fees to investors to borrow their stock and sell it on the open market in the hope the price will fall, enabling them to buy the stock back at a lower price, pocket the difference and return the stock to the owner.

By shorting Gartmore -- which is trading at just over half the level it floated at -- hedge funds are betting the price will fall further, most likely as investors take their business elsewhere.

On Wednesday a senior Gartmore source told Reuters the firm was preparing to lose a large chunk of the 3.5 billion pounds run by Guy.

Gartmore's shares shed one fifth following news of Guy's exit and the firm looks poised to lose more business as investors follow star managers and their advisers put Gartmore on watch lists.

Guy's departure comes at the end of a miserable first year as a listed company for Gartmore, which lost another star manager, Guillaume Rambourg, in July.

"Gartmore needs to act swiftly to protect its assets," said Singer Capital Market analyst Sarah Ing. "We believe a trade sale is the most likely outcome."

PRIME BROKERS

Given how tightly Gartmore stock is held by private equity backer Hellman & Friedman and Gartmore staff, the stock out on loan represents a large proportion of available stock for shorting at about one-third, Data Explorers said.

However, the recent spike in stock lending could have been fueled by prime brokers hoarding the stock, in anticipation of demand from short sellers.

Prime brokers told Reuters they had so far seen little interest from hedge funds.

"We saw a little bit of short interest ... although there hasn't been so much since the price stabilized," said one prime broker who asked not to be named.

Short sellers are not alone in keeping a close watch on Gartmore.

Financial services firm Hargreaves Lansdown (HRGV.L) has removed the Gartmore European Absolute Return Fund from its top-funds recommendation, the Wealth 150 list, following news of Guy's departure.

Long term institutional investors, however, are standing by Gartmore for the time being.

Municipal pension schemes London Borough of Brent and the Merseyside Pension Scheme told Reuters they are keeping "a close eye" on the situation, but have not put Gartmore on review.

The West Midlands Pension Fund, which has employed Gartmore as adviser on tactical asset allocation for many years, has "for the moment, no plan to make any changes," said CIO Judy Saunders.

While the danger of further talent exodus remains real, senior staff that have stayed with the company so far are likely to sit tight, according to a head-hunter specializing in asset management.

"If you are a fund manager and running a product line producing reasonable performance you might well think you don't have anything to lose by sitting tight for now and seeing how this unfolds," the head-hunter, who spoke on condition of anonymity, said.

"There could be real upside in being given a big dollop of underperforming shares and being part of a turnaround story," he said.

(Additional reporting by Raji Menon and Chris Vellacott), Editing by Sinead Cruise and Erica Billingham)