Hedge Funds Gain by Betting Against Deutsche Bank

By Giles Turner and Laurence Fletcher

Hedge funds that have placed bets against Deutsche Bank AG are reaping the rewards.

Deutsche Bank shares fell up to 8% in morning trading Friday, reaching a record low, before recovering but still down 5% in early afternoon trade in Frankfurt. This followed reports that clients, including several large hedge funds, have pulled billions of dollars from the bank amid concerns about its stability and their exposure.

Greenwich, Connecticut-based AQR Capital Management, which runs $159 billion in assets, revealed that it had a short position in Deutsche Bank on Wednesday, according to a filing made public by the German regulator Thursday.

Hedge funds Marshall Wace LLP, Discovery Capital Management LLC and Highfields Capital Management LP have all recently increased the size of their positions against the bank, according to filings.

Hedge funds' bets against the troubled German lender have been cranked up in recent days, although they are still below levels hit earlier this summer.

A measure known as utilization--the amount of shares that have been borrowed as a proportion of shares available to borrow--rose to nearly 10% on Wednesday, up from 6.8% the day before, according to data group Markit. At the start of last week it was just 3.8%. Stock out on loan is seen as a good proxy for short interest from hedge funds.

A spokeswoman for AQR declined to comment. Discovery didn't immediately respond to a request for comment. Marshall Wace declined to comment. A spokeswoman for Highfields didn't immediately respond to a request for comment.

AQR was also among a number of funds that have recently taken steps to withdraw securities or cash from the bank, or dial back their trading activities, The Wall Street Journal reported Thursday.

The move from some hedge funds is only a fraction of client balances held with Deutsche Bank, and doesn't mean that the funds have stopped doing business with Deutsche Bank.

"Our trading clients are amongst the world's most sophisticated investors," Deutsche Bank said in a statement Thursday. "We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the U.S. and the progress we are making with our strategy."

In a letter to employees on Friday, Deutsche Bank Chief Executive John Cryan said: "You will have seen speculation in the media that a few of our hedge fund clients have reduced some activities with us. That is causing unjustified concerns. We should consider this in the context of the bigger picture: Deutsche Bank overall has more than 20 million clients."

European regulation requires hedge funds to declare short positions that equal 0.5% or over of a company's stock. Marshall Wace, a large U.K.-based hedge fund, first declared a 0.5% short position in Deutsche Bank in February. By Tuesday, it had doubled its bet to 1.03%.

Write to Giles Turner at giles.turner@wsj.com and Laurence Fletcher at laurence.fletcher@wsj.com

(END) Dow Jones Newswires

September 30, 2016 08:46 ET (12:46 GMT)

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