23/09/19

HEDGE FUNDS: Some are set to Thrive After Thomas Cook Failure.

As published on uk.reuters.com, Monday September 23, 2019. 

LONDON (Reuters) - The collapse of travel operator Thomas Cook (TCG.L) is set to result in a bumper pay day for a clutch of hedge funds who bet the company’s share price would fall.

Around 600,000 holidaymakers have been left stranded abroad after last-minute talks over a financial rescue package faltered, bringing to an end the company’s 178-year history.

After struggling for months under a crippling debt burden and market-related hits to revenues, it had agreed a rescue package with China’s Fosun (1992.HK), only to see lenders demand the firm stump up more cash, forcing it into liquidation.

As a result of its long-running troubles, hedge funds had increased the size of their collective ‘short’ bets against the company, with funds including TT International and Whitebox Advisors together short nearly 7% of the company’s stock.

In a short trade, a hedge fund pays a small fee to borrow a company’s shares and then sells them into the market, hoping to buy them later at a cheaper price and return them to the original owner, pocketing the difference as profit.

When a firm goes bust, once the insolvency administrator has signed off on the collapse of the company their obligation to buy back the shares disappears and they can keep all the profit.