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Hedge Funds Lost Billions by Short Selling the Market 

Hedge Fund Short Sellers Suffer Massive Losses 

Hedge funds lose money betting against stocks when the stocks they short sell go up in price instead of down. Short selling is a strategy that involves borrowing and selling stocks that the hedge funds expect to decline in value, hoping to buy them back later at a lower price and keep the difference as profit. When the stocks they short sell go up in price, the hedge funds lose money as they have to buy them back at a higher price than they sold them. The loss can be infinite, as there is no ceiling to how high a stock price can soar. 

According to my web search results today hedge funds have lost billions of dollars in recent days and months by betting against the US and European stock markets, which have rallied sharply due to positive economic data, vaccine news, and market optimism.  

Some of the most shorted stocks include the likes of Tesla, Apple, Amazon, Netflix, Carnival Corp, and some Swedish real estate and US green energy companies, have seen their share prices soar, inflicting heavy losses on the hedge funds that bet against them. The rally forced many short sellers to buy back the stocks they sold, hoping to limit their losses. This created a short squeeze, which drove the prices even higher and hurt other short sellers.  

Here are some hedge funds that lost big from short selling:  

Partners Section

Bank Partners

  • Melvin Capital 
  • Light Street 
  • Samlyn Capital 
  • Balyasny 
  • Arrowstreet Capital 

As US and European stock markets have rallied sharply in recent days, hedge funds that had bet on their decline have faced an estimated $43bn of losses. Many short sellers had targeted companies that were vulnerable to higher interest rates, but they were wrong-footed by a “painful” bounce-back in “low quality” stocks this month, according to Barclays’ European equity strategist Emmanuel Cau. This was driven by the market’s increased optimism that the US Federal Reserve has finished its cycle of rate hikes. 

The surge, which has put the S&P 500 index on Wall Street on course for its best month since July last year, was triggered by US Federal Reserve chair Jay Powell’s apparent hesitation to tighten monetary policy further when he kept rates unchanged at the beginning of the month. Then, weaker than expected US consumer price inflation data released last Tuesday gave stocks another boost, with the S&P 500 and the Nasdaq Composite indices both having their best days since April. Analysts said the upswing caused a severe “short squeeze” in which some hedge funds bought back stocks to cover their negative bets, which helped push share prices even higher 

The recent “easing of financial conditions may have made some dead cats bounce”, said Barry Norris, chief investment officer at Argonaut Capital, referring to the rebound in lower quality stocks. Funds lost $43.2bn on short bets in the US and Europe from Tuesday to Friday last week, according to calculations by data group S3 Partners, which do not take into account gains that funds may have made in other stocks they own. 

Technology, healthcare and consumer discretionary stocks were among the most expensive for hedge funds, S3’s data shows. For example, a 14 per cent rise in the week to Monday in the share price of cruise line Carnival Corp cost hedge fund short sellers a total of $240mn. Indices tracking heavily-shorted stocks have bounced back strongly from recent lows as market sentiment has improved rapidly. Goldman Sachs’ Very Important Short Position index, which tracks the 50 constituents of the S&P 500 with the highest total dollar value of short interest outstanding, is on track for its best month since October last year. 

Barclays’ most shorted stocks in Europe basket has risen 9.9 per cent over the past three weeks, putting it on course for its biggest monthly gain in at least 10 years, Bloomberg data showed. Some heavily shorted Swedish real estate companies have hurt hedge funds in recent days. While SBB’s shares have plunged by around three-quarters this year, giving big profits to short sellers, it rose by a third in the week to Monday. 

That hit funds such as Samlyn Capital, Balyasny and Arrowstreet Capital, according to regulatory filings and analysis by data group Breakout Point. Meanwhile, Castellum, whose shares are shorted by Two Creeks Capital Arrowstreet and Fosse Capital, has jumped 16 per cent this month. Last Tuesday, when the US inflation data was released, was a “squeeze day,” said Brian Heavey, an equity trader at JPMorgan, who wrote in a note that macro hedge funds had been “very short” consumer goods groups due to their exposure to higher rates. As a result, the sector has posted “huge gains” during November’s index-wide rally, Heavey added.  Other rate-sensitive sectors reacted similarly. Shares in US green energy companies Fuelcell Energy and Sunrun — which have fallen this year and remain heavily shorted — on Tuesday soared by around a fifth. The rapid turnaround in markets has been especially hard for trend-following hedge funds known as commodity trading advisers, which use algorithms and strict risk management metrics to exploit market patterns in global futures markets. 

Here is a summary of the performance of companies and market indices mentioned above: 

  1. US and European Stock Markets: These markets have seen a significant rally in recent days. 
  1. S&P 500 Index: This index is heading towards its best month since July of the previous year. It closed at 4,783.35 on December 28, 2023. 
  1. Nasdaq Composite Index: This index experienced one of its best days since April, closing at 14,742.856 on January 2, 2024. 
  1. Goldman Sachs’ Very Important Short Position Index: This index, which monitors the 50 constituents of the S&P 500 with the highest total dollar value of short interest outstanding, is set for its best month since October of the previous year. 
  1. Barclays’ Most Shorted Stocks in Europe Basket: This index has increased by 9.9% over the past three weeks, making it on track for its largest monthly gain in at least a decade. 
  1. Swedish Real Estate Companies (SBB and Castellum): SBB’s shares have dropped by around three-quarters this year but rose by a third in the week to Monday. Castellum’s share price decreased by 59% between January 2, 2022, and May 16, 2023. 
  1. US Green Energy Companies (Fuelcell Energy and Sunrun): These companies, which have declined this year and remain heavily shorted, surged by around a fifth on Tuesday. 

For the most up-to-date information, it’s recommended to check the latest market data. 

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