LONDON (Reuters) - Ten hedge funds betting on a fall in AA shares are set to reap collective paper profits of more than 16 million pounds after its stock dropped by up to 30 percent.

The British roadside recovery group and insurer's shares crashed on Wednesday after it revealed plans to cut dividend payments and forecast lower core profit.

Computer-driven hedge fund firm AQR Capital Management, which follows market patterns using algorithms, was set to make the biggest gain, with a paper profit of 5.86 million pounds, based on a share price of 89 pence as of 0930 GMT.

AQR, like many of the other hedge fund firms, had taken long-standing bets that AA shares would fall, using so-called short trading positions.

Ten hedge funds had outstanding shorts in AA above 0.5 percent, the level above which European regulators require disclosure, the most recent filings, dated Feb. 19, with Britain's Financial Conduct Authority showed.

In a short trade, a fund borrows a company's stock to sell on, on the premise it will buy it back later at a cheaper price.

Profits on short trades are dependent on how much hedge funds have to pay to borrow a stock. While it is not known how much each of the 10 hedge funds paid to borrow AA shares, the borrowing cost was at the lower end of its 12-month average, according to data from FIS' Astec Analytics.

London-based hedge fund firms Marshall Wace, GLG Partners and TT International each made about 1.2 million pounds from their position, according to Reuters calculations.

TT International first disclosed a short position above 0.5 percent on Aug. 10, days after AA announced the sudden departure of its executive chairman.

Shorting activity hit a more than one-year peak on Feb. 6, shortly ahead of AA's pre-close update, but has since been falling slowly, showed data from FIS' Astec Analytics.

GLG declined to comment, while AQR, TT International and Marshall Wace were not immediately available for comment.

(Reporting by Maiya Keidan; additional reporting by Simon Jessop; editing by Alexander Smith)

By Maiya Keidan and Carolyn Cohn