OilyPete/Geckoman8 May 2012 13:14
OilyPete - Looking at it, they sold down 56,806,703 shares to 48,014,190 (8.79 million shares) and purchased 444,451 CFDs on the 23rd April. Total number of shares (with voting rights) is therefore 48,458,641 shares according to the RNS. I don't think the CFD mentioned in the RNS was a 'short' as on the 23rd Apr there was virtually no movement to the share price on that day. The fall had already occurred. They may well have shorted the fall through a subsidiary or perhaps directly (but then I would have thought they would have to disclose their activity). The fact that it says total voting rights held suggests to me the CFDs purchased are long. On the date of the 23rd the share price was 1.75 so it would be plausible to think they have taken out a 20:1 leverage on their 444k CFDs (roughly the 8 million they sold). Any gains from here are the same. They are obviously very confident at this level!
Geckoman - It looks to me like they have sold down and leveraged their investment (see above). Not hedged although they might have hedged their position previous. Hedging is having a different position open, leveraging is a safer means of going long on a share. What you described btw is perfectly legal. When companies place shares there is no obligation for the subscribers to hold nor is there anything to stop them from shorting their share.
Leveraging explained
In finance, leverage (sometimes referred to as gearing in the United Kingdom, or solvency in Australia) is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:
1) A public corporation may leverage its equity by borrowing money. The more it borrows, the less equity capital it needs, so any profits or losses are shared among a smaller base and are proportionately larger as a result.
2) A business entity can leverage its revenue by buying fixed assets. This will increase the proportion of fixed, as opposed to variable, costs, meaning that a change in revenue will result in a larger change in operating income.
3) Hedge funds often leverage their assets by using derivatives. A fund might get any gains or losses on $20 million worth of crude oil by posting $1 million of cash as margin.
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