Hedge funds betting that the collapse in Finnish telecom group Nokia's share price would continue got a rude surprise on Tuesday, and their rush to unwind their bets left the stock eyeing a record daily gain.
Nokia shares, which are down 93 percent from a 2000 high of 65 euros ($85.60), rose nearly 50 percent on news the firm would sell its handset business to U.S. group Microsoft, a move analysts said should lure back longer-term investors.
Before the announcement nearly 12 percent of Nokia's stock was out on loan from long-term holders of the stock, which is an indication of the demand by hedge funds and others to borrow the stock to engage in a 'short' trade.
The trade, where the hedge fund sells the borrowed stock in the hope of buying it back more cheaply later and pocketing the difference, had been increasingly popular as Nokia lost ground in the smartphone market over the last few years.
All of which made news of the deal unwelcome to the funds, which had borrowed around two thirds of the available stock, according to Markit data, and scrambled to buy it back and close out loss-making positions.
Hobart Capital director Justin Haque said the deal and the ensuing spike in Nokia's share price would hammer hedge funds.
"It's going to be a long/short body bag job," he said.
According to the latest regulatory filings with Finland's market watchdog, U.S. fund Discovery Capital Management LLC is the fund with the biggest net 'short' position on Nokia, at 2.26 percent of the firm's shares outstanding.
No one at Discovery Capital was available to comment.
Viking Global Investors LP, Maverick Capital LTD, Blue Ridge Capital LLC and Lone Pine Capital LLC also featured among Nokia's biggest shortsellers.
Based on the number of shares being shorted and Tuesday's jump in the price, the losses for hedge funds for the day could represent up to 640 million euros ($843 million), according to Reuters calculations.
"You are looking at something which is much more predictable and therefore less interesting for the hedgies," said Mirabaud Securities analyst Susan Anthony. "Nokia would be smaller, but more profitable."
Demand to short the stock was likely to fall further in the future as the company stabilizes its finances and strategy and appeals to investors betting on the company's long-term health.
"Nokia should be able to reinvent itself as a more staid and stable company, which should make it a better investment for long-term investors," said Simon Maughan, head of research at Olivetree Financial Group.
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