Hedge Funds Target UK Water Companies with Short Positions Amid Thames Water Crisis

Hedge funds including multi-strategy firm Millennium Management and systematic equity manager Arrowstreet Capital are actively shorting the assets of UK water companies, following a crisis at Thames Water that has exposed significant debt levels throughout the sector. According to a Bloomberg report, these hedge funds are betting against water utility firms after concerns over financial stability in the wake of Thames Water’s struggles.

Regulatory filings show that Millennium holds a short position in United Utilities Group, which operates water and wastewater services in northwest England. Meanwhile, Arrowstreet Capital is shorting Pennon Group, which owns three water utilities in southwest England.

The report also reveals that other debt-laden water utilities, such as Southern Water Services Finance and Yorkshire Water Finance, are also under pressure from short-sellers. The financial strain in the sector has intensified after Thames Water failed to raise new equity, resulting in a standoff with the UK’s industry regulator, Ofwat. This conflict led to a default at the parent company earlier this month, with the risk of the UK government potentially placing Thames Water under special administration, which could further erode confidence in the sector.

Short interest in United Utilities has spiked, increasing from just 2% in July 2022 to nearly 7% in mid-April 2023, although it has since fallen to 5.3%. Additionally, short interest in Southern Water bonds has surged, with 6.6% of bonds maturing in May 2028 now out on loan, up from approximately 0.8% at the start of the year. These developments reflect growing concerns over the financial health of the UK’s water utilities and the impact of debt burdens on their stability.