BlackRock, the world’s largest asset manager, has emerged as the main user of financial derivatives in accumulating stakes in Irish publicly-listed companies, after new disclosure requirements came into force late last year.
The New York-based fund manager, which has $4.8 trillion (€4.2 trillion) of assets under management – larger than the Japanese economy – has used contracts for difference, or CFDs, to bolster its positions in companies from CRH to Greencore, according to stock exchange filings.
Toscafund Asset Management, a UK hedge fund run by Martin Hughes – nicknamed the Rottweiler for his sometimes aggressive investment style – also used CFDs as its stake in Permanent TSB reached 4 per cent in May.
The fund’s swoop on the bank, leaving it as the second-biggest shareholder after the State’s 75 per cent interest, took place as the stock languished almost 60 per cent below the price at which the Government and bank sold shares in the bank last year at €4.50 each. Almost an eighth of Toscafund’s holding in the bank is through CFDs.
Some seven years after secrecy around CFDs accelerated the demise of Anglo Irish Bank, Ireland finally enacted laws last November to prevent the build-up of secret stakes in public companies, as it transposed amended European market transparency legislation. It was six years later than originally planned.
CFDs allow investors to take a leveraged bet on assets from shares to oil prices either falling or rising in value.
Prominence
They came to prominence in 2008 after the family of Ireland’s then richest man Seán Quinn built up a clandestine 28 per cent stake in Anglo Irish Bank between 2006 and 2008 using the instruments.
Mr Quinn said in court in February 2014 that, all told, his family lost €3.2 billion on its leveraged investment in Anglo Irish. In the wake of the Quinns’ bet and the collapse of the property market, the bank which was nationalised in 2009 and put into liquidation four years later.
While enabling legislation was enacted by the Oireachtas in 2009 to close off a controversial loophole that allowed clandestine stake-building in companies beyond 3 per cent, a commencement order was never signed. Ultimately, the Department of Finance decided to hold off introducing rules, in order to align its rules with European legislation being developed.
By contrast, the UK introduced rules back in 2009 that require CFD holders to disclose their position in a company once it passes the equivalent of a 3 per cent stake. While CFDs can be an efficient instrument for professional fund managers to boost returns, the Central Bank has repeatedly warned smaller investors about the risks of these leveraged instruments.
Exposure
Greencore, for example, informed the stock market earlier this month that BlackRock held a 3.37 per cent direct stake in the food group. However, adding in the asset manager’s CFD exposure, equivalent to 0.6 per cent of the stock, brought its entire position to 3.97 per cent, according to the filing.
BlackRock has also used CFDs for part of its investments in Kingspan, CRH, Smurfit Kappa, Paddy Power Betfair and DCC.
Amsterdam-based hedge fund Farringdon Capital Management has used CFDs to build up one of the biggest positions in Independent News & Media, behind businessmen Denis O'Brien and Dermot Desmond. Over 95 per cent of its 4.4 per cent stake is through the derivatives.
Elsewhere, Fidelity International’s Bermuda-based FIL Ltd, which manages $258.4 billion of assets, has used CFDs for half its 4 per cent stake in insurer FBD. It has also used the instrument for part of its holding in C&C.
