Hedge-fund short sellers, chased into the bunkers a year ago by upstart amateurs, are marching again.
Twelve months after being targeted by day traders on Reddit’s WallStreetBets forum, professional speculators are furiously reloading bets against a stock market priced as richly as any in two decades. Their short sales increased at the fastest rate in more than 10 years during the last five weeks, data compiled by Goldman Sachs Group Inc.’s prime broker show.
The awakening has happened as a newly hawkish Federal Reserve sent the S&P 500 to its worst January since 2009 and pushed the Russell 2000 Index of small-cap stocks into a bear market. While coming at a time that corners of the profession are drawing regulatory scrutiny, it’s another sign of institutions flexing their muscle after ceding the stage to retail day traders in 2021.
“That’s a better backdrop than if everybody was still in that FOMO,” said Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., referring to fear of missing out. “Complacency and over-optimism -- nothing to see here, new paradigm, stocks never go down -- that’s a dangerous environment.”
Hedge funds tracked by Goldman have boosted short positions in every week but one since early November. These growing bearish wagers worked as a buffer when their long holdings, particularly those crowded bets in expensive tech stocks, were battered in the latest rate-induced rout.
At times, when stocks rallied and these bears were forced to cut losses by buying back the borrowed shares to cover their shorts, the process added further fuel to the upside. The dynamic appeared to be playing out on Tuesday, when the most-shorted stocks led the market’s advance, rising more than 2% as a group.
Still, the volume of shorts is rising from subdued levels, perhaps a consequence of last year’s retail siege. The average stock’s short interest equaled to less than 4% of the shares outstanding at the end of last month, near the lowest level in almost two decades, data compiled by Leuthold Group show.
No constituency took more lumps in 2021’s retail revolution than hedge fund managers whose short positions, in a few celebrated instances anyway, blew up spectacularly when targeted for squeezes by loosely aligned day traders who congregated online. Billions of dollars were lost by funds who bet heavily against GameStop Corp. and AMC Entertainment Holdings Inc. only to see the shares catapulted out of years-long funks via crowd-sourced buying sprees.
As famous as those defeats were, however, they were somewhat less common than is popularly thought. New research from Leuthold shows that in the year since GameStop peaked, the 50 stocks with the most short interest have done what bearish investors expected them to -- trail the market -- in all but one month.
On average, since last January’s squeeze, the top quintile of most-hated stocks in Leuthold’s universe of some 3,000 companies dropped 14% through the end of last month.