The Long and Short of It

Byline Times published an article which claimed that there was an ‘£8 billion bet on No Deal’ (exiting the European Union without a withdrawal agreement). This claim has been widely shared on social media.

This article examines this claim, and the failure to replicate a key graph produced by Byline Times.

A £8.3bn bet on leaving the EU without a deal?

The Byline Times article makes the following claim:

Currently, £8,274,350,000 (£8.3 billion) of aggregate short positions has been taken out by hedge funds connected to the Prime Minister and his Vote Leave campaign, run by his advisor Dominic Cummings, on a ‘no deal’ Brexit.

First, I should explain what a ‘short’ is. Shorting a stock means you do the following:

1. Borrow the shares of a company, usually from a broker;

2. Sell those shares immediately at market price under the agreement to repurchase those shares later;

3. Once repurchased, return the borrowed shares to the owner.

If you believe the share price will fall in future, you can make money from that decrease. However, the share price could also rise, meaning you would make a loss. If you believe the share price would rise, you would purchase the shares.

Shorting stocks are scrutinised by regulators, such as the Financial Conduct Authority. It is possible to abuse shorting, such as shorting a stock and then releasing a negative analysis of the targeted company, in the hope their share price would consequently fall.

It is inaccurate to say the summed market values of various short positions are “on a ‘no deal’ Brexit”, or a “bet on No Deal”.

Short positions are taken under the expectation that the targeted company’s share price will fall in the future. The time period is not disclosed. Some companies may be shorted due to reasons entirely unconnected with the UK’s economic and political relationship with the European Union nor based on whether the UK leaves the EU on 31st October 2019.

For example, it is very difficult to characterise the shorting of Kier Group as being a “bet on No Deal”. The contractor is currently having difficulties due to delays in Crossrail.

It is unclear why every short position taken by specific hedge funds is a “bet on No Deal”. Even if estimated correctly…