Hedge funds scale back bets against Scottish Mortgage

Hedge funds have closed bets against Baillie Gifford’s Scottish Mortgage Investment Trust after a large fall in its share price, despite concerns over board governance and exposure to risky private companies.

James Hanbury, who runs the Brook Absolute Return and Developed Markets funds at Odey Asset Management, is among investors to have scaled back their short positions on the technology-focused company, one of the most popular investment funds in the UK, with £13.4bn of assets.

According to an investor update this week, seen by the Financial Times, Hanbury said he had pared back some of his short positions, “notably some of [the] position in Scottish Mortgage”, in a sign that investors believe the share price might be nearing the bottom.

The move follows a difficult year for Scottish Mortgage, one of the biggest fund winners from the sharp rises in technology stocks during the first two years of the coronavirus pandemic. The trust has been hit by a sell-off in tech and other growth stocks, pushing its share price down by more than a third over the past year and by nearly 60 per cent from its all-time high in late 2021. The trust trades at a 20 per cent discount to its net asset value.

It also comes after one of the trust’s board members sounded the alarm last week on governance and valuation concerns. Amar Bhidé, a director of Scottish Mortgage since 2020, told the FT he had clashed with chair Fiona McBain over the process to appoint two new board members and his view of the risks in the trust’s unquoted companies, which represent about a third of its portfolio.

Hanbury has been shorting Scottish Mortgage for some time, according to documents seen by the FT. The trust is among a number of stocks he has bet against as their high valuations are hit by rising borrowing costs. He has profited from its decline.

Other investors have also closed out or reduced their short positions on the trust. Data from S&P Global Market Intelligence shows that the percentage of shares in Scottish Mortgage on loan — an indicator of short selling activity — has dropped to 0.1 per cent from nearly 1 per cent last summer and close to 0.7 per cent at the start of this year.

Crispin Odey, founder of Odey Asset Management, said he now had only a small short position on Scottish Mortgage but believed the trust still faced headwinds.

“It’s got problems and it’s very expensive still and of course they’ve got quite a lot in private equity ventures, tech ventures, which is dangerous — they all demand rights issue after rights issue. So the percentage in unquoted stocks will keep on going up and people will get scared.”

The trust’s exposure to unquoted stocks, which has crossed its 30 per cent limit several times, is one of the reasons its shares are trading at such a large discount to the value of its assets, according to analysts.

Its holdings in private companies have allowed customers to take advantage of growth opportunities not otherwise readily available to retail investors. It invested in Chinese ecommerce firm Alibaba before it went public as well as spacecraft manufacturer SpaceX and Swedish battery maker Northvolt.

Last week Baillie Gifford contacted institutional clients to defend the trust’s decision to invest in private companies.

“For what it is worth, investing in private companies is core to the Scottish Mortgage proposition, and the trust has been doing so since 2012,” the Edinburgh-based fund group wrote in an email.

“I do believe it is well understood that we are not acting as a traditional venture capital investor, rather deliberately as late-stage investors in private companies.”

Baillie Gifford declined to comment. Odey also declined to comment.