Many Uber shareholders have been forbidden from selling shares until six months after the IPO. That restriction may have given them an extra reason to bet against rival rideshare operator Lyft.

Once Lyft shares began their precipitous slide, it was clear to many Uber investors that their stock was in danger. After all, Lyft had priced at a healthy multiple around 5.6 times 2019 estimated sales, at least a turn above Uber. But without that valuation cushion, loss-making Uber became trickier to value.

That caused problems even before the Uber IPO came together. While the company technically sold about 11% of the company in the IPO, there were plenty of sellers in the secondary market shopping their shares around in the weeks before.  Accounting for such share sales, there may have been 20% to 25% of the company for sale around the time of the IPO, according to IFR.

Once the IPO happened, others investors may have found creative ways to reduce exposure without violating the lockup rules. One such strategy of dubious legality is to place shares in an LLC and sell an interest in it to others.

But there was another hedge hiding in plain sight: Betting against Lyft.

“There may be an impact from shareholders subject to lockup who may see the competing ride hailing firm as the best available hedge,” said Sam Pierson, Equities Analyst at IHS Markit. “The shares in float for both firms are relatively small compared with shares outstanding, so even a small amount of hedging could be significant as a percentage of float.”

There has been an extraordinary increase in Lyft short sales that coincided with its dramatic share-price decline. Some 66% of the available float of Lyft share has been sold short, Mr. Pierson said.

Of course, the effect could work in both directions. Locked-up Lyft shareholders may also want to short Uber as a hedge. But as Mr. Pierson points out, the float of Uber shares is about four times as large as the Lyft float. That suggests the impact on Lyft shares would be far greater.

Indeed, only about 7% of the Lyft float has been shorted. (Mr. Pierson said that data is preliminary so soon after an IPO and the true figure may be higher, though not dramatically).

One risk is that a decline in both stocks creates a vicious cycle as investors grow worried about protecting profits from shares they bought months or years ago.

“If the shares of both firms continue to sell off the opportunity to hedge may become more attractive, which could add to selling pressure,” Mr. Pierson said. “On the flip side those shorts may also be less sensitive to increases in share price, provided the share prices demonstrate significant positive correlation.”

One mitigating factor is that Lyft has become extraordinarily expensive to short. There are so few shares available that a new short seller must pay between 45% and 60% annually to borrow the stock.

But with the Lyft lockup expiring in just a few months, the scarcity issue will soon disappear. Lyft investors, now more than ever, should be sure to look both ways.

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