HBOS closed below its rights issue price for the first time yesterday, as some of the best-known hedge funds in London and New York revealed that they were betting the bank's stock will fall.

Shares in Britain's biggest mortgage lender closed down 4.25 per cent at 270¼p a share, compared with the 275p price of subscription to the bank's £4 billion rights issue. Shareholders will vote on the capital-raising on Thursday at the bank's extraordinary general meeting.

It is the third time that HBOS's share price has slipped below the subscription price, amid wild fluctuations since the rights issue was announced in April. Rules introduced by the Financial Services Authority (FSA) last Friday to stop those betting on stock price falls - short-sellers - from manipulating the market in the shares did little to prevent a further slide. HBOS is one of the most heavily shorted stocks in the FTSE 100, with 8.5 per cent of its market capitalisation on loan to short-sellers. According to Data Explorers, which monitors stock lending, a key element of the shorting process, this figure has risen from 4 per cent on June 5, and is well above the market average of 4.5 per cent of stock on loan.

Under the FSA's new rules, investors shorting more than 0.25 per cent of a company during a rights issue must declare their position. The regulator may bring in even stricter rules, such as a ban on lending the shares of companies carrying out rights issues.

Lansdowne Partners, the London hedge fund manager, said yesterday that it was shorting 0.58 per cent of HBOS's market capitalisation. Of this position, 0.49 per cent is held by Lansdowne's global financials fund.

Harbinger Capital Partners, the $25 billion (£12.7 billion) American hedge fund manager, is shorting 3.29 per cent of HBOS. Harbinger was founded by Philip Falcone, an activist investor who recently forced The New York Times to elect two new board members after criticising the newspaper company for being too slow to develop its internet offerings.

Harbinger apparently generated returns for investors of more than 65 per cent after correctly predicting the crash in the sub-prime mortgage market. Mr Falcone also attracted attention when he purchased a $49 million mansion in New York previously owned by Bob Guccione, the founder of Penthouse magazine. The FSA said yesterday that it was monitoring announcements made on the HBOS short positions.

Mediator Capital Management, a London hedge fund manager, has a 0.3 per cent short position in HBOS. Mediator, along with GLG Partners, UBS O'Connor and Ferox Capital Management, was fined by the French financial regulator last June for using inside information to trade shares ahead of a bond issue by Vivendi, the French media company.

Last week, HBOS gave warning of another £1 billion in writedowns on investments hit by the credit crunch.

UBS analysts lowered their target price on the stock yesterday, predicting that mortgage arrears will continue to rise into the second half of next year.

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