LONDON Hedge funds are betting that a prolonged consumer squeeze and a further shift to online shopping could spell trouble for Britain's retail chains, and are targeting some of its best-known electrical, clothes and supermarket stores.
With the economic downturn and government tax hikes eating into consumer spending, many hedge funds believe that less money to go round will mean few firms emerge unscathed.
High street entertainment retailer HMV and rival Blockbuster UK called in the administrators this week, both hit hard by customers moving online to buy music or DVDs.
Electricals firm Dixons, Argos owner Home Retail, and supermarket giants Tesco and J Sainsbury are among those whose stocks are being shorted by funds, data for bets outstanding as at January 14 published by Britain's Financial Services Authority shows.
Dixons, which has made one half-year profit in Britain and Ireland in five years, faces an existential threat from internet rivals, one fund manager said.
"They can't differentiate their products and they can't offer a lower cost product offering. It makes it very difficult for them," he said.
Dixons' rival Comet went into administration late last year, while camera specialist Jessops became the first high-profile failure of 2013 when it called in administrators, closing 187 stores with the loss of 1,370 jobs.
In other industries, while predictions are less catastrophic, firms targeting middle-income customers will struggle, fund managers and analysts say.
Top-end clothes and food retailers still appeal to wealthy shoppers, while firms such as Associated British Foods' discount clothing business Primark are winning over cost-conscious consumers in tough economic times.
In the key food sector, for example, upmarket Waitrose, part of the John Lewis Partnership, as well as discount chains Aldi and Lidl, saw strong sales growth just as Morrison and Sainsbury's posted disappointing performances for the Christmas period.
The top five most shorted stocks in the FTSE 250 - as measured by the percentage of their shares outstanding on loan, a common measure of short-selling interest - are all retail stocks, according to research from Markit.
Short-selling is the practice of betting on a price to fall. Managers can profit from their view by borrowing shares and selling them in the hope of being able to buy the share back at a cheaper price before returning it to its original owner.
Hedge funds are notoriously shy about revealing - even to clients - the reasons for shorting a certain stock. Most do not publish details of their shorts in monthly letters that list the fund's top holdings and are sent out to investors.
Shorting also remains a controversial practice after many funds were blamed for exacerbating volatility during the height of the 2008 financial crisis by betting against shaky banks. Supporters say short-selling improves the efficiency of markets.
Odey Asset Management, one of London's best-known funds, and the U.S. firm Lone Pine Capital, are among at least nine funds with bets against Home Retail, which is reinventing its troubled Argos business for the digital age, the FSA data showed.
Lone Pine built up its short position to 1.41 percent earlier this month while Odey has a position of 0.51 percent.
Lee Ainslie's Maverick Capital, a veteran stock-picker, is holding a huge 4.45 percent short - equivalent to about $70 million (43.7 million pounds) - in Home Retail.
Meanwhile, Lansdowne Partners, which manages around $12 billion in assets and runs the largest European hedge fund focused on shares, has a 0.57 percent short position in Tesco, Britain's biggest supermarket chain, according to the FSA data.
Lansdowne has also built shorts of 2.51 and 0.6 percent against rivals WM Morrison and Sainsbury's respectively, the data showed, as well as a hefty 2.73 percent bet against 220-year old books and stationery seller WHSmith.
The FSA has published its list of all short positions that reach 0.5 percent or more of a company's issued share capital since November 1, following the introduction of European Union rules to improve transparency.
ONLINE VERSUS HIGH STREET
Elsewhere, AKO Capital, BlackRock Investment Management and Soroban Capital Partners are shorting Marks and Spencer. Last week the retailer reported worse-than-expected non-food Christmas sales.
According to the data, hedge funds are also betting against loss-making baby products retailer Mothercare and floor-covering firm Carpetright.
"Disposable income in the UK is still being squeezed mercilessly: wage growth is currently running at less than half the rate of inflation ... One way or another, shoppers in the UK have less money to spend and they are increasingly circumspect of how they spend what remains," Mike Ingram, a market analyst at BGC Brokers, wrote in a note on Tuesday.
Not all the hedge fund bets against retailers have gone their way. Shares in Home Retail, for example, rose by more than a third last year as investors reacted positively to the company's plans to restructure Argos for the digital age.
Many have also faced a "short squeeze" when results that surprise to the upside suddenly send shares hurtling higher, making it more costly for hedge funds to return the share they borrowed from its original owner.
And while the focus of bets have been on the High Street, some have targeted online retailers too, often at a loss.
"There's been a general view for some time among funds that it's better to be long online retail and short the bricks and mortar," one hedge fund investor said.
"Managers have found it a lot easier to get their heads round (high street shops) and see that some of these guys are struggling and will even go out of business."
But at least 11 hedge funds including Steve Cohen's $14 billion SAC Capital are taking aim at Ocado, with many believing the upmarket online grocery business will struggle to be profitable. Shares in the group, however, finished last year up by around 50 percent after falling heavily in 2011.
The value of shares in ASOS, the online fashion retailer, and also the target of short-sellers, doubled in 2012 as sales grew.
(Reporting by Tommy Wilkes; Editing by Sinead Cruise and Anna Willard)