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Hedge Funds Lose Millions On IAG, Easyjet, Wizz Air Short Trades

Tim Worstall
Tim Worstall trader
Updated 6 Jan 2022
  • The fading of Omicron worries has airline shares – IAG, Easyjet, Wizz – rising strongly
  • In examples of how not to structure a trading position airlines have risen exactly as hedge funds were going short
  • Getting the pandemic wrong is going to be expensive for those short these airlines
  • Trade Wizz Air Holdings PLC commission-free here.

International Consolidated Airlines Group SA (LON: IAG) – the owners of BA and Iberia – shares, plus those of Easyjet PLC (LON: EZY) and Wizz Air Holdings PLC (LON: WIZZ) are up strongly this week as worries about covid start to recede. The macroeconomic implications of omicron seem to be that near everyone is going to get it, not too many will be damaged and so the world will return to something like normal. After all, if we’ve all had covid then hunkering down to avoid it is no longer necessary. 

It’s entirely possible that it won’t work out that way but the thought that it will, has pushed the three stocks up 10% or so each this week. As we discussed about IAG.

News today is that a number of hedge funds got this wrong and went short on those stocks. There’s more to this than just schadenfreude, that well-known joy in seeing someone else make an error. It’s a lesson on how careful we’ve got to be in constructing a trading position. After all, it is possible that omicron is the end of the affair. At which point we’ll all start flying again and the rubble of the airline industry will be able to reconstruct itself. Results from the airlines – Wizz and Ryanair have both recently shown good passenger levels – seem to indicate that we will all roar back into flying again. There’s also that point that certain of the marginal players have gone bust reducing industry capacity at the same time. That should lead to higher fares and so to fatter bottom lines. 

But it’s equally possible to be bear here. Anyone who believed the modelling numbers (yes, we know, Imperial and all that) would think that we were about to go into another continent-wide lockdown. Given the stretched nature of most airline balance sheets – for entirely understandable reasons – this would not be bullish for the sector. 

It’s this second story that certain hedge funds seem to have believed. Ken Griffin’s Citadel (the people who cleaned up that hedge fund which went near bust over GameStop) went short 1.66% of IAG. That’s about £130 million at the sale price and they did this just before, hours even, the IAG price jumped 10%. Sandbar Asset Management had a position of about the same size (£110 million) but spread across IAG, Easyjet and Wizz Air. That position becoming large enough to report on Dec 30 – just before the 10% average rise in the sector.

Yes of course it’s very amusing watching other people lose money. But the lesson for us as traders is that sifting the information about which way prices are going to go requires care. In this case not believing the official worries about omicron and instead, taking the contrary view would produce a profit by being bullish on airlines. The trading problem being that being contrary doesn’t always work – only sometimes and identifying those times being the core of the game.  

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Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.