How Hedge Funds Profit From 150,000 Stranded Thomas Cook Vacationers

Topline: Although the bankruptcy of travel agency Thomas Cook has been a nightmare for hundreds of thousands of stranded travelers, for some hedge funds who bet against the travel agency’s survival, it could prove a substantial payday.

• Reuters first reported that several hedge funds had placed “short” bets against the company—a technique used by investors to make money from falling share prices. In a short trade, hedge funds pay to borrow a company’s shares, then sell them into the market, then buy them back again at a cheaper price to return to the owner for a profit.
• Thomas Cook’s collapse, as when any other firm goes bust, means that obligation to buy back shares disappears, leading to more profits for the funds who bet against the travel agency.
• The funds with the biggest shorts on Thomas Cook include TT International, with 3.83%, and Whitebox Advisors, with 3.15%. Others with large positions included, Kite Lake Capital Management (1.3%), Melqart Asset Management (1%), Silver Point Capital (0.92%), and Pictet Asset Management (0.51%). Both TT and Whitebox declined to comment.
• There’s not necessarily an obligation to notify the Financial Conduct Authority about shorts—that depends on the size of the position—so it remains unclear how many hedge funds in total had a short position on the stock, or how much profit can be expected, since short positions are built up over time (at different prices).
• Hedge funds could also profit from credit default swaps on Thomas Cook—essentially insurance on company debt that gets paid out even if repayments are not met.
• Before trading was suspended, shares of Thomas Cook were going for 3.4 pence (less than half a U.S. penny) a share on the London Stock Exchange.

What we don’t know: While many of these funds had short bets on Thomas Cook, it is unclear how many involved also had credit exposure (as an attempt to hedge risk), as that would substantially affect any profits from betting against the company.

Key background: After 178 years in business, the Thomas Cook travel agency and airline abruptly liquidated on Monday morning, leaving more than 150,000 travelers stranded abroad. The collapse of the world’s oldest holiday firm has set off the U.K.’s “biggest peacetime repatriation in history.” The company had been struggling under crippling debt and declining revenues, and was forced to liquidate after a financial rescue package from China’s Fosun fell through.