Hargreaves Lansdown is one of Britain’s largest stockbrokers and retail investment platforms helping millions of retail investors manage their savings investments and stock trading. So there is a certain amount of irony that the stock should be in the sights of that most speculative group of market participants, the short sellers.
Why would you short-sell HL Shares?
Short selling is the practice of selling something you don’t own in the expectation of repurchasing it, at a lower price, for a profit, in the future.
- Further reading: What is short selling?
A short seller believes that a current price doesn’t accurately reflect the true value of a stock, security or other tradable instrument. They are effectively saying this is mispriced by the market and will ultimately correct as reality sets in.
There is a long history of short selling in the financial markets, indeed the ability to go short is one of the reasons that there are effective, continuous two-way prices and liquidity in those markets.
The ability to trade short was once limited to institutional traders but with the introduction of cash-settled CFDs, it became far easier for retail investors to short-sell as well.
Because they no longer needed to deliver the stock or bonds that they sold short, rather they just paid or received the cash differential between their opening and closing prices.
In this instance, however, it’s not retail traders that are short of Hargreaves Lansdown instead it’s the polar opposite.
Several of the world’s best-known hedge funds and money managers have built up a significant short position in Hargreaves Lansdown. They include Marshall Wace, Point 72 and BlackRock.
According to disclosure data, collated by the FCA, Hargreaves Lansdown is the third most shorted UK stock with- 6.10% of its stock being shorted by the hedge funds.
Looking back over the last 12 years, since the disclosure regime began, the outstanding short position in HL stock is the biggest it has ever been.
Why is HL a bear target?
Why have the hedge funds and institutions built up such an aggressive short in Hargreaves Lansdown and what if anything does it say about the prospects for the company and its share price?
The funds are making a bet against Hargreaves Lansdown and its business model.
Perhaps they have been reading the pages of the Good Money Guide because we have regularly questioned the economics of the retail brokerage and investment sector which is undergoing intense competition with new entrants frequently joining the market.
That means that fees and margins in the sector are under threat.
For example, it is no longer uncommon for brokers to offer commission-free share dealing in US equities and low-single-figure minimum ticket charges in UK and European equities.
There are few winners if any in a race to the bottom.
This environment means that the business models of brokers and retail investing platforms are becoming focused on volumes and economies of scale, at a time when the cost of acquisition of customers is getting dearer.
The short sellers expect this new economic reality to be reflected in the stock price of Hargreaves Lansdown, and over the medium term they’re being proved right. The Hargreaves Lansdown share price (HL) is down by almost -57% over the last three years.
True Hargreaves stock price has shown some signs of life recently rallying +8.46% over the past three months.
However, a recent “Dear CEO” letter to the sector, from the FCA, inquiring about how much deposit interest is passed on to clients versus how much is kept by brokers and platforms, and how that fits in with new consumer duty regulations, has created another cause for concern.
However, a recent note on the stock from US investment Bank Jefferies suggests that the FCA won’t take action against Hargreaves Lansdown over interest income differentials. Analyst at the bank have reiterated their buy recommendation and £10.50 target price.
That the beauty of a situation like this we get a ringside seat for the battle between the shorts sellers and the rest of the market if the shorts are right then the HL share price will continue to fall as the firm’s profitability suffers, but if they are wrong then we could see a scramble to cover prompting a classic short squeeze.
- Compare: Best brokers for going short
With over 35 years of finance experience, Darren is a highly respected and knowledgeable industry expert. With an extensive career covering trading, sales, analytics and research, he has a vast knowledge covering every aspect of the financial markets.
During his career, Darren has acted for and advised major hedge funds and investment banks such as GLG, Thames River, Ruby Capital and CQS, Dresdner Kleinwort and HSBC.
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As well as extensive experience of writing financial commentary, he previously worked as a Market Research & Client Relationships Manager at Admiral Markets UK Ltd, before providing expert insights as a market analyst at Pepperstone.
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