One of London’s most successful hedge fund managers emerged yesterday as a rare bull of Northern Rock, placing a £50 million bet that its share price would rally.

RAB Capital, which made spectacular returns for its investors during the mining boom of 2004 to 2006, has snapped up a 6 per cent stake in the beleaguered bank.

The investment was made by its $2.3 billion (£1.1 billion) RAB Special Situations fund, which takes opportunistic positions but usually invests with a one to five-year time horizon. The fund is understood to have bought a 4.8 per cent stake on Monday and Tuesday and then topped up with another 1.4 per cent yesterday. The Rock stake accounts for 4.2 per cent of the fund portfolio. Most of the purchases are thought to have been made in the 250p-300p range, so the fund is currently sitting on a loss after yesterday’s 72p share slide to 185p

The fund is managed by Philip Richards, a former army officer and a devout Christian. He told The Times yesterday that he was concerned about the rampant short-selling of some bank shares. “If the Bank [of England] allows Northern Rock to go under or forces it into a fire sale at a derisory price, that’s an encouragement to the shorts. The shorts will find another target and create an atmosphere of panic if they succeed with this one.”

There is growing concern that some short-sellers could be contributing to the jitters not only in share markets but also on the high street, by targeting banks and in some cases even by putting out false rumours. HBOS yesterday was hit by an untrue rumour that it had been forced to approach the Bank of England for an emergency line of credit.

Northern Rock is estimated to have short positions against it equivalent to 50 per cent of its total market value.

The RAB fund is up by 18 per cent so far this year, trouncing the overall share market. Since 2003, investors have made 49 times their money.

Mr Richards is thought to view the liquidity crunch paralysing the Newcastle bank as easing, thanks to the Bank of England’s U-turn on providing three-month liquidity to the market and the half-point cut in US interest rates.

He is also thought to argue that although the Northern Rock brand has been damaged, it is not irreparable. His contrarian bet contrasts with the views of many investment bankers, who regard Rock as probably unsellable as a going concern. One said: “I don’t see why anyone would want it now. The logic of buying it before was there was some goodwill value, based on the brand. But that’s all gone now. There is no brand.”

Martin Slaney, of the brokerage GFT Global Markets, said: “There is still no sign of any bid interest at all. None of the rumoured names have come along to show an interest and, to be honest, why would they?”

Yesterday Citigroup cut its target price for Northern Rock from 400p to 150p. Shares in the bank closed down almost 28 per cent at 185.2p a share.

However, retail investors sided with Mr Richards and continued to pile into Northern Rock. The Share Centre, a retail stockbroker, reported a 591 per cent week-on-week increase in the number of people opening share-dealing accounts, mainly because investors were keen to take advantage of the weakened Northern Rock share price. The bank accounted for 34 per cent of all dealing done via the Share Centre on Wednesday.

It emerged last night that Northern Rock rejected in the summer the offer of emergency support from JPMorgan, thought to be worth £500 million.

Compensation on FSA agenda

The tripartite arrangements for rescuing institutions in difficulty should be reexamined in the wake of the Northern Rock affair, Sir Callum McCarthy, Financial Services Authority chairman, said last night.

He stopped short of any mention of a rift between the FSA and the Bank of England, instead calling for a review of the compensation scheme for depositors.

Referring to the roles of the Treasury, Bank and FSA, Sir Callum said: “There are long-standing components of these arrangements which need reexamination,” notably the compensation scheme.

The FSA is understood to have been pushing the Bank towards a more accommodative attitude to struggling banks long before it finally capitulated this week. Speaking to bankers at Mansion House last night, Sir Callum said he sympathised with the anxieties of Northern Rock savers who had queued for their savings a few days ago.

He said that, with the notable exception of Northern Rock, Britain’s banks had “coped well” with liquidity pressures so far. Referring to the abrupt change of sentiment in financial markets, he said: “We have moved from one abnormal state of affairs – too little risk aversion, to another abnormal state – too much risk aversion.”

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive