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Hedge fund short-sellers hope for turnaround after USD16 billion Dow Jones drubbing

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Hedge fund short-sellers have taken a five-month drubbing on bets against the Dow Jones, as the sustained summer rally torpedoed their negative wagers to the tune of USD16 billion – but September’s sell-off has stemmed losses, leading to hopes of an upturn in fortunes.

The robust performance of the Dow Jones Industrial Average in the aftermath of March’s Covid crash brought month-on-month hits to short positions, new analysis from London-based equity research firm Ortex Analytics shows.

The index – which tracks the stock market performance of the 30 largest listed US companies – gathered pace from April onwards, which left short sellers each month in the red.

Managers betting against Dow companies lost around USD5.8 billion in April, while August dealt the biggest blow, handing contrarian managers a USD6.3 billion beatdown amid the bullish run.

More recently, September’s market reversal has eased the agony, with hedge funds generating almost USD2.8 billion in profits from negative positions, as volatility ticked upwards.

That may indicate the tide is turning following the “significant pain” suffered by contrarian funds, said Peter Hillerberg, co-founder of Ortex.

“Short sellers thrive in volatile markets,” Hillerberg said.  “Only this month we’ve had Donald Trump’s positive coronavirus test result, which sent shockwaves through markets. Next month we have the US election.

“Short sellers will be looking to use this opportunity to get back on the front foot and will be hoping for a turnaround in what should have been a stellar year for them.”

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