Hedge fund short sellers took a hefty beating in what proved to be a bruising July, losing some USD6 billion across a range of strong-performing technology stocks, including more than USD4 billion from Tesla shorts alone.
New data from Ortex Analytics, a London-based equities research and analytics outfit, indicates hedge funds who went short on Amazon, Apple, Alphabet, and AMD along with Tesla suffered large losses as their bearish bets turned sour amid the stock market’s impressive Q2 rally.
But Peter Hillerberg, Ortex’s co-founder, believes the post-Covid market landscape of higher share prices and elevated volatility may again offer short sellers an advantage further down the line.
“Short sellers will feel battered and bruised after what has been a very difficult July,” Hillerberg said, as negative wagers were sent into a tailspin by better-than-expected results last month.
Many investors fled their negative positions in Tesla during July, with the number of bets against the electric vehicle pioneer tumbling 26 per cent – just as its share price rallied some 32 per cent for the month.
That move duly handed Tesla short sellers a USD4.1 billion loss, according to Ortex data.
Other well-known names – Amazon, Apple, Alphabet, and AMD – brought an additional USD1.8 billion loss amid what Hillberg described as a “short squeeze phenomenon”, in which a company’s share price is sent soaring as short sellers race to exit their positions.
“In some instances, panic has set in and a rush to the exit appears to have amplified losses,” he said.
Now, though, short sellers are looking to regroup following the July hit.
Hillerberg said new positions have opened up in recent days as investors seek to capitalise on rising share prices.
“This isn’t the end of the story,” he suggested. “It’s quite likely that we’ll see the pendulum swing back in favour of short sellers as they adjust to post-Covid market conditions.”
While the woes at Wirecard AG, the scandal-hit German electronic payments firm, and Intu, the troubled UK shopping mall operator, brought rich rewards for bearish managers earlier this summer, it hasn’t all been one-way traffic for short-sellers.
Big bets placed against UK supermarkets such as Sainsbury’s and Morrisons at the start of the coronavirus outbreak faltered as share prices in the sector remained resilient during lockdown.
Short positions against Tesla – often considered the world’s most shorted stock – held steady throughout the company’s continued rally. Earlier this year, hedge funds running convertible bond arbitrage strategies were reckoned to be holding close to half of all reported Tesla shorts, according to IHS Markit analysis.