Hedge funds are showing themselves more likely to take a short position in a company with a large proportional pension deficit, that is, a pension deficit that is large in comparison with the company's market capitalisation. Data Explorers has found that the 20 FTSE350 companies with the largest proportional pension deficits also have an above-average short interest: the short interest in their shares is 3.6 per cent, while the average short interest across the FTSE350 is only 2.3 per cent.
Will Duff Gordon, a director of Data Explorers, said: "Hedge funds tend to focus more on how a company is trading rather than a structural weakness such as their pension deficit when judging their prospects. To a certain extent, the high short interest in firms with large pension deficits is a coincidental crossover. When the share price falls a long way, as is the case with many UK retailers this year, it clearly attracts short sellers seeking to profit from this decline. A side effect rather than a cause of the price fall is an increased pension deficit when judged against company value.
"However, an ageing population means pensions need to be paid for longer, while the volatile stock markets and low interest rates are making life extremely tough for those relying on a decent return on the assets held in their pension funds. This suggests that pension deficit issues may increasingly play a key role when forming judgements about a company’s future."
The trend will increase pressure on banks in particular, because they typically have large pension schemes.
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