Volkswagen ordinary shares are down today after yesterday’s report of increased short positions.

Stock out on loan, a good indication of shorting, has doubled over the past month to 2 pct of total issuance, according to figures from Dataexplorers.

When the freefloat is only roughly 10 pct, then this is a significant position.

It was only in October that hedge funds shorting VW ords were caught in the mother of all short squeezes, when Porsche said it had effective control of 74.1 pct of VW, leaving less than 6 percent tradeable in the market and hedge funds scrambling to cover their positions.

VW ords quadrupled, VW briefly became the biggest company in the world by market cap, and managers were looking at what was described at the time as the biggest loss in hedge fund history, although in reality some of the losses may have been borne elsewhere.

It’s a brave trade to be taken on again. But as hedge funds have shown, they are often the ones to take the bets others simply won’t comtemplate.

2008 may have been the year of shorting imperilled financials, but 2009 could be the year of shorting companies with too much debt or those bearing the brunt of the recession.

Numbers from Dataexplorers show Consumer Discretionary and Industrials are among the sectors with the most stock out on loan in the UK– a good indicator of short-selling activity.

Recent articles on Hedge Hub have shown that short-sellers have been setting their sights on stocks in both sectors, targeting those companies for whom the mountain of debt built up in the good times may prove too much, even with an easing of credit markets.

Alternatively, funds may be wary of companies very exposed to a prolonged economic downturn — retailers and manufacturing.

Information Technology is the UK sector with the most short interest, following a strong rally since March.

Meanwhile, there may yet be question markets over the huge rally in financial stocks — the sector has seen the biggest increase (18 percent) in short positions over the past week.

Sector                                           Pct of market cap on loan

Consumer Discretionary                             2.84

Consumer Staples                                     0.77

Energy                                                      0.47

Financials                                                 1.39

Healthcare                                                1.56

Industrials                                                 2.39

Information Technology                              2.89

Materials                                                  1.02

Telecom services                                       0.77

Utilities                                                    1.02

Source: Dataexplorers

(See also Indebted companies - long or short?, Not so good old Yellow Pages and Caught Short)

Hedge Hub readers shouldn’t have been too surprised by yesterday’s 15 percent slump in Yell’s share price.

The directories firm — the one behind the UK’s Yellow Pages — faces months of talks with banks and shareholders after yesterday saying it plans to restructure its roughly 4 billion-pound debt burden for the second time in nine months.

Yell has had to battle a slump in classified advertising spending and a shift to online from print publications, and analysts have been predicting it could breach its covenants as soon as the start of next year.

Our blog on June 23, citing research from Dataexplorers, showed that Yell Group is among the top ten non-financial firms with the biggest net debt to equity ratios out of the 300 largest listed companies in the UK.

We also showed that Yell ranked 1st in Dataexplorers’ Negative Sentiment indicator, which highlights where stock out on loan — usually used for shorting — has been highest and is rising.

Some fund managers have been buying, and making money out of, companies whose share prices were trashed last year because refinancing looked difficult, but where access to funds have recently become easier.

However, firms treading too close to the edge — carrying massive debt burdens while trading is rocky — could find it a different story.

The research also highlighted Debenhams as being in the top ten for net debt to equity and 4th on the negative sentiment score, as well as several companies in the U.S., Japan and Europe.

Which company is next in line for its share price to take a kicking because of its debt?

Hedge funds and other investors are shorting stocks laden with the biggest debts, according to stock lending research group DataExplorers, betting they may struggle to refinance themselves.

According to the research, Yell Group and Debenhams are among the top ten non-financial firms with the biggest net debt to equity ratios out of the 300 largest listed companies in the UK.

They also rank 1st and 4th respectively in Dataexplorers’ ‘Negative Sentiment’ (DNS) indicator, which is highlights where stock out on loan — usually used for shorting — has been highest and is rising.

In Europe, meanwhile, Itinere Infraestructuras and Grupo Ferrovial are among the top ten firms with the biggest net debt to equity ratios, and rank 8th and 15th in Dataexplorers’ DNS score.

In the U.S., Caterpillar and Autozone are in the top ten for debt ratios and rank 40th and 44th on the DNS, while in Japan debt-heavy Kintetsu, Japan Airlines and Odakyu Electric Railway rank 9th, 12th and 13th on the DNS score.

“This reflects recent concerns about banks failing to lend, or to roll over existing loans, as well as the capacity of some companies to service debt from current revenues,” the paper says.

This bet by many funds is in stark contrast to the view expressed by Crispin Odey, who earlier this year pointed to the start of a new bull market and who recently told clients he sees the best opportunities in “prodigal” companies.

“I still find myself coming out of meetings with companies whose share price is up fivefold since January and wanting to fill my boots,” he enthused.

“But it is quite a narrow field. It encompasses companies that at one stage looked like they would be denied refinancing but have now secured it.”