A Hedge too far

The humble hedge is a quintessentially British feature of our landscapes and gardens. Despite having lost half of our hedges in the past century, there are still more than 390,000km of thriving hedgerows in Great Britain, enough to wrap around the equator 10 times.

While a hedge can beautifully delineate a garden boundary and play a vitally important role in our ecosystem, it can also serve as a financial tool to minimise risk and protect against a market downturn as George Soros, Crispin Odey and Michael Bury can all attest to.

George Soros, the Godfather of short selling, was dubbed the ‘man that broke the bank of England’ after his $10 billion bet against the pound expedited the Bank of England’s demise and its subsequent ejection from the European Exchange Rate Mechanism (ERM) triggering Black Wednesday in 1992. He successfully donned his shorts 15 years later, making in the region of $4bn during the global financial crisis, but this time he was not alone. Crispin Odey infamously shorted banking stocks, while Michael Bury paved the way for Scion Capital and Steve Eisman to net billions of dollars by shorting collateralised debt obligations and mortgage-backed securities, made legendary by Hollywood’s adaption of ‘The Big Short’. But to echo John Maynard Keynes, the path to hedged riches is littered with the corpses of those who were unable to remain solvent while markets remained irrational. It’s risky business and there are but a handful who have successfully deployed the strategy once, and even fewer who succeeded again. 

The Brexit referendum represented another opportunity. Many believed the UK housing market would suffer and as such hedged a basket of companies in 2016, such as Berkeley Homes, Savills, Foxtons, Barret Developments, Land Securities and British Land to name but a few. While prime central London (PCL) liquidity evaporated and prices drifted lower, they under-estimated the resilience of the mainstream housing market, which continued to capitalise on a lower interest rate environment. Positions were swiftly unwound in all but those that had inherent internal structural issues unrelated to the housing market.

The very same situation is playing out today. Short interest in the same basket of companies spiked again last year in an attempt to capitalise on the inflation crisis and while there was a knee-jerk reaction to share prices similar to 2016, it seems once again the strength of the housing market has been underestimated. Inflation and higher rates simply poked the sleeping PCL lion which roared back in the face of the bears and the mainstream market shrugged its shoulders once more. It’s somewhat ironic that 70 per cent of UK homeowners don’t have a mortgage and are therefore better off with higher rates, yet the Bank of England deploys the same strategy of yesteryear. 

Property stocks have whipsawed in the past few months incinerating any remaining short interest which has all but been closed out. Savills’ share price has rallied 30 per cent since the darkest hour of last year, while Land Securities has fared even better, posting a 40 per cent increase in the face of continued negative media. As any seasoned gardener will tell you, it’s best to trim your hedges during the winter and this year it seems it’s not only the botanists who have taken to pruning.