By LUMIKK555 @ Shutterstock.com
Originally posted December 14, 2022.
Short-selling hedge funds are celebrating 2022 as falling stocks, tight money, and an energy crisis create prime opportunities for them. Laurence Fletcher reports for the Financial Times:
“Recently we’ve been getting more absolute return from the short book,” said Chris Crawford, who runs a long-short hedge fund for Eric Sturdza Investments. “The reality is setting in for these companies,” he said, referring to unprofitable groups that investors rushed into during the bull market.
Higher interest rates have ratcheted up the pressure on firms whose business models rely on access to cheap debt while they also make the projected future cash flows of high-growth but unprofitable tech companies less attractive.
As well as exposing the fragility of companies with a seductive narrative but no earnings, the seismic shift in interest rates has aided short sellers in other ways.
Short sellers, who borrow shares that they then sell in the market, hold cash with their broker until they close a trade, ideally by buying back the shares at a cheaper price. Higher rates now mean that the interest earned on that cash outstrips the cost of borrowing the shares, according to Goldman Sachs data, earning them a tidy profit even before any gains on the particular bet itself.
The chilling effect of the falling stock market on retail investors, particularly those who raced into so-called meme stocks, has also been a boon.
Some managers such as D1’s Daniel Sundheim considered reducing short positions after suffering big losses in last year’s GameStop fiasco, while some switched from single stock bets to wagers against an index to curb losses. But now many feel more confident to bet against individual stocks again, say industry insiders, knowing they are less likely to be targeted by retail investors.
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