Lloyds Bank at centre of hedge fund battle - report

Lloyds Banking Group is at the centre of a tussle between hedge funds based largely on the prospects for the UK's economy, the Financial Times reported.

Marshall Wace has a record £100m short position on Lloyds' shares, reflecting the £49bn fund's belief that Britain's biggest retail bank's problems have further to go.

Longtime Lloyds supporter Lansdowne Partners has been having a tough time and has dropped from the top of the share register to a lowly position. But other hedge funds, led by Harris Associates of Chicago, have replaced it.

Harris holds almost 7% of Lloyds and is its biggest shareholder. Specialist funds Longview, Artisan and Mondrian are also top 10 investors, reflecting the riskiness of Lloyds' prospects, the FT said. The bank's shares have halved this year after the UK economy plunged into recession with a surge in unemployment feared.

Lloyds, which owns Halifax, is the UK's biggest mortgage lender and current account provider. It is also a big lender to UK businesses and has almost no overseas revenue after selling its international operations following the financial crisis. It is by far the most exposed of the UK's banks to Britain's fragile economy, which faces twin threats of Covid-19 and Brexit.

Marshall Wace's short position - a bet that the shares will fall - is a source of "bitter irony" at Lloyds, the FT said. The bank's chairman, Norman Blackwell, was a Brexit supporter and now Marshall Wace's Paul Marshall, another Brexit fan, is betting Brexit will be bad for Lloyds.

Lloyds' supporters say it has plenty of capital and that its share price values the bank at barely half its asset value, providing room for upside. The economic backdrop could also improve quickly, they argue.

"If there is a vaccine or a Brexit deal or both then suddenly the outlook for the UK economy doesn't look so bleak," Harris's Jason Long told the FT.

The bank set aside an extra £2.4bn for bad debts in the second quarter and said it was ready for a "significant deterioration" in the economy. The bank is also looking for a new boss before Antonio Horta-Osorio leaves in June 2021 with Robin Budenberg taking over as chairman early in the new year.

Lloyds shares rose 0.7% to 26.07p at 10:26 BST.