Hedge funds made $25 million from shorting Thomas Cook - with some convinced the stock would go to all the way to zero
- Funds including Melqart, TT International, Whitebox Advisors and Silver Point built up short bets against Thomas Cook, likely profiting handsomely when the tour operator collapsed this week.
- "A number of hedge funds seem to have been betting on zero (or at least very close to zero)," research firm Breakout Point said in an email to Business Insider.
- Thomas Cook's stock has plunged 96% in the last year.
- The company declared bankruptcy on Monday, after the government rejected a proposal to bail the company out. Its collapse stranded hundreds of thousands of tourists.
Thomas Cook's collapse on Monday left workers unemployed, tourists stranded on holidays, and investors out of pocket.
But some hedge funds had been piling up big bets that the stock would plunge - a sign that they foresaw the outcome, and profited handsomely.
London-based Melqart, a fund focusing on event-driven stock moves in Europe, more than doubled its short since August 1, "and was adding to the short even the last week," the research firm Breakout Point said.
The biggest shorts in Thomas Cook were held by London's TT International, with a position making up about 3.7% of the stock. TT specializes in long-term bets and alternative strategies.
US firm Whitebox Advisors, which is multi-strategy alternative asset manager, held about 3.15%. TT and Whitebox have been holding these positions the longest - since end of March when the stock was worth about 25 pence.
Silver Point Capital, a hedge fund based in Greenwich, Connecticut, also had a short position making up about 0.9% of the shares.
Melqart, TT, and Whitebox declined to comment. A request for comment from Silver Point was not immediately returned.
Thomas Cook is the most shorted UK stock in Breakout Point's records, with the research firm saying the stock had the biggest rise in short interest in UK in 2019.
So called big shorts, or those making up more than 0.5% of the traded stock, went from 0% in January to as much as 10.7%.
It's tricky to know which funds shorted outright and which bets were intended to hedge against other positions.
This makes calculating how much any fund profited from these short bets a difficult task. But as of July 13, short interest was about 10% while the market cap of the stock was about £200 million, Breakout Point said.
"Assuming that approximately all were kept until zero - there were some decreases and increases in-between, so this is an approximation - then short-selling hedge funds gained about £20 million ($25 million) from these shorts," the firm said.
The British travel company and airline declared bankruptcy on Monday, stranding about 600,000 people globally. The company had been holding a series of crisis talks with potential buyers and the UK government.
"They were holding to their shorts even as market cap went down to sub £100 million levels, and in spite of several significant price spikes," Breakout Point said to Business Insider, which suggests a very high-conviction position.
Unlike in the US, some European regulators require funds to disclose short positions in stocks that breach 0.5% of the outstanding shares. Breakout Point then analyzes the hedge fund filings.
Some did warn that Thomas Cook's demise was a possibility. Barclays analysts, after cutting the price target from 46 pence to 17 pence in June, said: "We believe it (TCG) could double or go to zero pence."
