Hedge funds receive £10m windfall from RBS share sale

It is estimated that hedge funds profited by around £10m by shorting shares in the Royal Bank of Scotland (RBS), adding to the controversy surrounding the government's sell-off of the bank.

The funds apparently took advantage of information leaks about the sale of the government's stake in the bank, according to data from analysts Markit.

Shorting surge

The period between interim results on 30th July and the actual sale on 3rd August saw a surge in the volume of RBS shares that were shorted.

Short-selling is the process by which a trader essentially 'borrows' stock from a broker in the belief that it will decrease in value. Shares used for short-selling reached their highest level for months around the RBS sale, with the number of shares used for short-selling almost doubling just before the sale.

On 30th July, RBS shares were priced at 353.2 pence at the beginning of trade but fell to 337.6 pence when markets closed on 3rd August.

Government failings

The government's failure to keep plans for the RBS sale secret helped the hedge funds take advantage, according to analysts.

Investec's Ian Gordon commented: "By allowing market speculation to build up, the Chancellor has created the conditions for hedge funds to profit at the expense of taxpayers."

The Financial Conduct Authority (FCA) said that it was looking into the circumstances surrounding the shorting trades to see if there were any possible violations of rules.

The effect on the UK economy has been a loss of £1.1bn from the sale of the government's 5.4% stake in RBS, putting Chancellor George Osborne under pressure for pricing the shares at 330p, far less than the 'break-even' price paid for the shares seven years ago in the £46bn bailout of the bank.