Hedge funds bet British retailers' troubles will deepen

* UK retail stocks top shorts in FTSE 250

* Online spending, falling consumer demand, hits retailers

* Dozens of UK, U.S. funds bet against well-known brands

By Tommy Wilkes

LONDON, Jan 16 (Reuters) - Hedge funds are betting that aprolonged consumer squeeze and a further shift to onlineshopping could spell trouble for Britain's retail chains, andare targeting some of its best-known electrical, clothes andsupermarket stores.

With the economic downturn and government tax hikes eatinginto consumer spending, many hedge funds believe that less moneyto go round will mean few firms emerge unscathed.

High street entertainment retailer HMV and rivalBlockbuster UK called in the administrators this week, both hithard by customers moving online to buy music orDVDs.

Electricals firm Dixons, Argos owner Home Retail, and supermarket giants Tesco and J Sainsbury are among those whose stocks are being shorted byfunds, data for bets outstanding as at Jan. 14 published byBritain's Financial Services Authority shows.

Dixons, which has made one half-year profit in Britain andIreland in five years, faces an existential threat from internetrivals, one fund manager said.

"They can't differentiate their products and they can'toffer a lower cost product offering. It makes it very difficultfor them," he said.

Dixons' rival Comet went into administration late last year,while camera specialist Jessops became the first high-profilefailure of 2013 when it called in administrators, closing 187stores with the loss of 1,370 jobs.

In other industries, while predictions are lesscatastrophic, firms targeting middle-income customers willstruggle, fund managers and analysts say.

Top-end clothes and food retailers still appeal to wealthyshoppers, while firms such as Associated British Foods' discount clothing business Primark are winning overcost-conscious consumers in tough economic times.

In the key food sector, for example, upmarket Waitrose, partof the John Lewis Partnership, as well as discount chains Aldiand Lidl, saw strong sales growth just as Morrison andSainsbury's posted disappointing performances for the Christmasperiod.

SHORT-SELLERS

The top five most shorted stocks in the FTSE 250 - asmeasured by the percentage of their shares outstanding on loan,a common measure of short-selling interest - are all retailstocks, according to research from Markit.

Short-selling is the practice of betting on a price to fall.Managers can profit from their view by borrowing shares andselling them in the hope of being able to buy the share back ata cheaper price before returning it to its original owner.

Hedge funds are notoriously shy about revealing - even toclients - the reasons for shorting a certain stock. Most do notpublish details of their shorts in monthly letters that list thefund's top holdings and are sent out to investors.

Shorting also remains a controversial practice after manyfunds were blamed for exacerbating volatility during the heightof the 2008 financial crisis by betting against shaky banks.Supporters say short-selling improves the efficiency of markets.

Odey Asset Management, one of London's best-known funds, andthe U.S. firm Lone Pine Capital, are among at least nine fundswith bets against Home Retail, which is reinventing its troubledArgos business for the digital age, the FSA data showed.

Lone Pine built up its short position to 1.41 percentearlier this month while Odey has a position of 0.51 percent.

Lee Ainslie's Maverick Capital, a veteran stock-picker, isholding a huge 4.45 percent short - equivalent to about $70million - in Home Retail.

Meanwhile, Lansdowne Partners, which manages around $12billion in assets and runs the largest European hedge fundfocused on shares, has a 0.57 percent short position in Tesco,Britain's biggest supermarket chain, according to the FSA data.

Lansdowne has also built shorts of 2.51 and 0.6 percentagainst rivals WM Morrison and Sainsbury's respectively, thedata showed, as well as a hefty 2.73 percent bet against220-year old books and stationery seller WHSmith.

The FSA has published its list of all short positions thatreach 0.5 percent or more of a company's issued share capitalsince Nov. 1, following the introduction of European Union rulesto improve transparency.

ONLINE VERSUS HIGH STREET

Elsewhere, AKO Capital, BlackRock Investment Management andSoroban Capital Partners are shorting Marks and Spencer.Last week the retailer reported worse-than-expected non-foodChristmas sales.

According to the data, hedge funds are also betting againstloss-making baby products retailer Mothercare andfloor-covering firm Carpetright.

"Disposable income in the UK is still being squeezedmercilessly: wage growth is currently running at less than halfthe rate of inflation ... One way or another, shoppers in the UKhave less money to spend and they are increasingly circumspectof how they spend what remains," Mike Ingram, a market analystat BGC Brokers, wrote in a note on Tuesday.

Not all the hedge fund bets against retailers have gonetheir way. Shares in Home Retail, for example, rose by more thana third last year as investors reacted positively to thecompany's plans to restructure Argos for the digital age.

Many have also faced a "short squeeze" when results thatsurprise to the upside suddenly send shares hurtling higher,making it more costly for hedge funds to return the share theyborrowed from its original owner.

And while the focus of bets have been on the High Street,some have targeted online retailers too, often at a loss.

"There's been a general view for some time among funds thatit's better to be long online retail and short the bricks andmortar," one hedge fund investor said.

"Managers have found it a lot easier to get their headsround (high street shops) and see that some of these guys arestruggling and will even go out of business."

But at least 11 hedge funds including Steve Cohen's $14billion SAC Capital are taking aim at Ocado, with manybelieving the upmarket online grocery business will struggle tobe profitable. Shares in the group, however, finished last yearup by around 50 percent after falling heavily in 2011.

The value of shares in ASOS, the online fashionretailer, and also the target of short-sellers, doubled in 2012as sales grew.