Morning Briefing: To short or not to short… That is the question.

This year’s steep decline in U.S. equities is juicing the returns of short sellers, who are on track for their first yearly gain since 2018 thanks in part to bets against shares of Tesla (TSLA.O), (AMZN.O) and other megacap growth stocks that have led markets higher for years.

Short sellers – investors who bet on declines in a company’s share price – are sitting on $303.7 billion in realized and unrealized gains, a fourfold increase compared with 2018, their last profitable year, data from analytics firm S3 Partners showed.

That works out to a 31.2% return on total average short interest of $973.6 billion throughout the year, according to S3 Partners.

Other top winners for shorts include Amazon, Meta Platforms (META.O), Apple Inc (AAPL.O) and used car seller Carvana Co (CVNA.N), S3 data showed. The S&P 500 is down almost 19% this year and on track for its biggest yearly percentage loss since 2008 after the Federal Reserve’s most aggressive rate increases in decades dried up risk appetite.

Not all short strategies worked this year. Long-short hedge funds, which bet on stock prices rising or falling, posted a 9.7% loss through November, according to data provider HFR.

Market swings sparked by economic data and Fed decisions have often wrong-footed investors and fueled lockstep moves in asset prices, making it more difficult to select individual stocks, traders said.

“It’s a very difficult environment because correlations (among stocks) are high,” said Venu Krishna, head of U.S. equity strategy at Barclays in New York.

At the same time, energy stocks such as Exxon Mobil Corp (XOM.N), Occidental Petroleum Corp (OXY.N), Chevron Corp (CVX.N) and Marathon Petroleum (MPC.N) notched big gains following a surge in energy prices, bruising those who bet against them.

Charles Lemonides, portfolio manager at $226 billion hedge fund ValueWorks LLC, believes tight monetary policy will weigh on risk appetite next year. His fund now has its highest ever level of overall short positioning.

“It’s much less likely that we will get back to the sort of dangerous enthusiasm on the part of investors for stocks like Tesla that took short-sellers to the cleaners in years past,” he said.

Companies that Lemonides is betting against include aircraft component supplier Transdigm Group (TDG.N), whose shares are up 1.45% year-to-date, and semiconductor company Broadcom (AVGO.O), whose shares are down almost 16%. (Source: Reuters)

No alternative text description for this image
Scroll to top