Stock Market

After U.S. stocks dropped, short sellers made almost $304 billion.

This year’s sharp drop in U.S. stocks is helping short sellers make money. They are on track for their first annual gain since 2018 thanks in part to bets against Tesla (NASDAQ:TSLA), (NASDAQ:AMZN), and other megacap growth stocks that have led markets higher for years.

Short sellers are investors who bet on a company’s share price going down. They are sitting on $303.7 billion in realised and unrealized gains, which is four times as much as they had in 2018, the last year they made money. S3 Partners says that this is a 31.2% return on the average short interest of $973.6 billion for the whole year.

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Bets against Tesla Inc., a company that makes electric cars, brought in the most money, with $15 billion in realised and unrealized profits on $19.3 billion worth of shares sold short. Shares of the electric car company are down about 60% so far this year. Many bearish investors have been burned by the company’s meteoric rise over the past few years.

S3 data showed that Amazon, Meta Platforms, Apple Inc. (NASDAQ:AAPL), and Carvana Co. (NYSE:CVNA), which sells used cars, were also among the top winners for shorts. The Federal Reserve’s most aggressive rate hikes in decades made people less willing to take risks, so the S&P 500 is down almost 19% this year and is on track for its biggest annual percentage loss since 2008.

This year “was easier for shorting because the economy felt like a headwind to the whole market, instead of a tailwind like in previous years,” said Moez Kassam, portfolio manager at long-short hedge fund firm Anson Funds, which manages about $1.7 billion and had a 4.9% gain through November. He said, “Shorts haven’t been possible for years.”

The fund’s best bets were against biotech company Novavax (NASDAQ:NVAX) Inc., whose stock has dropped more than 90% so far this year, and against electric car maker Rivian Automotive Inc., whose stock has dropped about 80%.

Mark Spiegel, who is in charge of the portfolio at Stanphyl Capital, has been shorting Tesla “constantly and in different sizes” since 2014. He said that a bet against Tesla was his fund’s most profitable individual short position this year. In 2022, the $18 million fund will have grown by about 60%. Since 2014, Tesla’s stock has gone up 1,271%.

Even though higher interest rates hurt growth stocks, some investors think that Elon Musk’s purchase of Twitter takes him away from running Tesla, which makes electric cars. Musk’s sales of Tesla shares have also hurt the stock, and investors have been looking for signs that people aren’t buying as many electric cars as they used to.

Spiegel has kept betting against Tesla because he thinks the stock has a long way to go before it’s worth what it’s worth.

Bearish investors haven’t had a good time in the last few years. Shorts lost $142.4 billion in 2021, when so-called “meme stocks” like GameStop (NYSE:GME) had big gains. This hurt a number of firms that had bet against GameStop and other similar companies. When the Fed cut interest rates to all-time lows in response to the COVID-19 pandemic in 2020, they lost $241,7 billion.This caused the markets to go up by a huge amount.

(Graph: Short sellers’ gains:

This year, not all short-term plans worked. Data from HFR shows that long-short hedge funds, which bet on whether stock prices will go up or down, lost 9.7% through November.

Traders say that market swings caused by economic data and Fed decisions have often caught investors off guard and caused asset prices to move in lockstep, making it harder to choose individual stocks.

Venu Krishna, head of U.S. equity strategy at Barclays (LON:BARC) in New York, said, “It’s a very tough market because correlations between stocks are high.”

At the same time, energy stocks like Exxon Mobil Corp (NYSE: XOM), Occidental Petroleum Corp (NYSE: OXY), Chevron Corp (NYSE: CVX), and Marathon Petroleum Corp (NYSE: MPC) made big gains after energy prices went up, hurting those who bet against them.

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Charles Lemonides, who is in charge of the portfolio at ValueWorks LLC, a $226 billion hedge fund, thinks that tight monetary policy will make people less willing to take risks next year. His fund currently has the most short positions in its history.

“It’s much less likely that investors will get as excited about stocks like Tesla as they were in the past,” he said. “Back then, short-sellers got hosed.”

Transdigm Group (NYSE: TDG), which makes parts for aeroplanes and has shares that are up 1.45% so far this year, and Broadcom (NASDAQ: AVGO), which makes semiconductors and has shares that are down almost 16%, are two companies that Lemonides is betting against.

He said, “There are a lot of companies out there that have a lot of debt, but right now equity investors see them as bulletproof.”

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