Many who bet against the market’s upward momentum have been left scrambling to cover their positions as stocks surged higher and defied their expectations.
Specifically, short-sellers sustained around $120 billion in mark-to-market losses in 2023, of which $72 billion occurred in the first half of June, according to a Wall Street Journal report on June 20, citing data from financial data firm S3 Partners.
Most of the short-selling positions are held by hedge funds and other institutional investors, highlighting their concerns about the stock market. Swollen company valuations and possible further interest rate hikes from the Federal Reserve is making many of these investors skeptical about the extent of the current market rally.
“There are still many investors and hedge funds who think that this rally is ready for a pullback. Or at least that several of the highflying stocks will lose steam and revert back to the mean.”– said Ihor Dusaniwsky, managing director of predictive analytics at S3.
Short interest in US exceeds $1 trillion
Short-sellers refer to investors who profit by borrowing and selling securities they anticipate will decrease in value, with the intention of buying them back at a lower price to return to the lender.
This month, total short interest in the US market surpassed the $1 trillion mark, representing its highest level since April 2022, per S3 Partners data. At the start of 2023, total short interest stood at $863 billion.
Meanwhile, another factor that contributed to the growing short-selling activity is the increasing use of leverage by hedge funds after taking a defensive approach at the beginning of the year.
“Hedge funds are increasing their market exposure, adding to both their long and short holdings, looking to play catch-up after missing some of the early year rally.”– added Dusaniwsky.
Why are short sellers losing money?
Put simply, short-sellers are incurring substantial losses primarily due to an exceptional stock market comeback after a very challenging 2022.
Moreover, some of the biggest short positions this year are held in some of the hottest stocks, such as Tesla (NASDAQ: TSLA), Apple (NASDAQ: AAPL), Nvidia (NASDAQ: NVDA), Amazon (NASDAQ: AMZN), and Microsoft (NASDAQ: MSFT), among others.
For instance, Tesla, which currently has the highest short interest as a percentage of available shares, at 3.3%, has seen its stock price more than double this year.
Similarly, shares of Nvidia nearly tripled year-to-date amid the ongoing artificial intelligence (AI) frenzy, while Apple, Microsoft, and Amazon’s stocks soared 47.8%, 44.6%, and 46.2% this year, respectively.