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Warning: Metro Bank isn’t the only FTSE 250 stock that hedge funds expect to crash

Today, I’ll be taking a closer look at the list of most-shorted stocks on the London Stock Exchange. Shorted stocks are those in which hedge funds and other sophisticated investors are making bets that the share price will fall. The hedge funds don’t always get it right, of course, but quite often they do, so it pays to be careful when it comes to heavily-shorted stocks. With that in mind, here are the three most-shorted UK stocks right now. 

Metro Bank

According to shorttracker.co.uk, challenger bank Metro Bank (LSE: MTRO) is currently the most shorted stock in the UK, with nearly 12% of its shares being shorted.

Now, Metro Bank shares have already had a shocking run over the last 12 months, losing over 85% of their value. They were down another 11% yesterday. Much of this has been related to the fact that the group has been trying to raise £350m to fill a hole in its balance sheet after an accounting error led to some loans being assessed in the wrong risk band. This capital raising will dilute existing investors’ holdings. The bank may also have to issue a significant amount of debt. Despite the significant share price fall, hedge funds clearly still think the stock will continue to decline and they’re loading up on short positions to profit from continued share price weakness.

As such, this is definitely a stock to avoid, in my view.

Arrow Global

The second most-shorted stock right now is Arrow Global (LSE: ARW). This is a credit management services provider engaged in the purchase, collection, and servicing of non-performing loans. Like Metro Bank, it has already experienced a substantial sell-off. Trading as high as 470p in mid-2017, the shares now change hands for around 190p.

Currently, around 11% of the shares in Arrow Global are being shorted, which is significant. It appears that hedge funds have concerns over the group’s transparency, balance sheet, and leverage ratio. Some funds have also argued that European debt collectors are overly optimistic about how much debt they will actually recover.

Despite the fact the shares are cheap, this is another stock to steer clear of, in my opinion.

Jupiter Fund Management

Finally, FTSE 250 fund management company Jupiter (LSE: JUP) comes in at number three on the list of most-shorted stocks. It currently has around 10% of its shares being shorted.

Jupiter seems to be a classic case of a company that is experiencing challenging conditions. With passive investing (ETFs) becoming more popular, many traditional active investment managers are struggling at the moment, and last year’s equity market sell-off has compounded problems. Just look at Jupiter’s FY2018 results – the company experienced £4.6bn of outflows for the year and profit before tax was down 7%. The dividend was also reduced by 13%.

Jupiter could turn things around at some point, and it’s worth noting that the new CEO has just bought a large parcel of shares. However, for now I’d avoid the stock. When a stock is being shorted heavily, often the best strategy is to give it a wide berth.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.