RYCEY Rolls Royce Holdings PLC (PK)

By Laurence Fletcher 

Hedge funds' bets against U.K. blue-chip stocks have risen to their highest level in more than five years, another sign of the bearish sentiment gripping investors this month.

Short interest, a measure of bets taken on falling prices, in FTSE 100 stocks has risen to more than 1.8% of total shares in the market, its highest level since June 2010, according to figures from data group Markit.

A pickup in short interest in recent months comes as markets have sold off sharply on fears that a slowdown in China's economy will weigh on global growth. The FTSE 100, for instance, has fallen 5% so far this month.

"Definitely, the bears are out," said Simon Colvin, research analyst at Markit. "We've only seen short sellers add to positions."

Short interest was a little over 1% at the start of last year, according to the data.

Years of rising markets in the U.S. and Europe, fueled by central banks' money printing and ultralow interest rates, made many funds wary of running big negative bets.

However, some feel conditions have now changed.

"The shorting environment is much improved," said Robert Duggan, partner at SkyBridge Capital, which invests in hedge funds and runs $13.1 billion in assets. "With the end of quantitative easing in the U.S., we've seen the removal of a major headwind to shorting stocks."

He has put money into equity hedge funds that run more short bets.

Supermarket J Sainsbury had the most short bets against it, as measured by percentage of shares on loan, with funds including Lansdowne Partners, Marshall Wace and Discovery Capital Management running negative bets, according to regulatory filings.

Miner Anglo American, against which Odey Asset Management and Key Group are running short positions, as well as fashion house Burberry Group and engine maker Rolls-Royce, which in November cut profit expectations, are also among the most-shorted stocks.

A handful of hedge funds have found reasons to be bearish for some time.

In October, Odey founder Crispin Odey told the Journal that he expected major stock markets to lose around 40%.

And London-based Lansdowne Partners, one of the world's biggest equity hedge funds, said in a note to investors the same month that during 2015 they had not put on any new bets on rising stocks of any scale, while they had spotted at least 10 new attractive bets on falling stocks.

Write to Laurence Fletcher at laurence.fletcher@wsj.com

(END) Dow Jones Newswires

January 27, 2016 14:05 ET (19:05 GMT)

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