Hedge Funds Reloaded Their Shorts Just in Time for a Tech Payday

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Short selling, a strategy that was all but left for dead in the wake of the meme-stock mania, is working pretty well at the moment.

Hedge funds in particular seem to have timed recent tech stock declines almost perfectly, pushing up bearish bets just before the market rolled over. A basket of the 50 most-shorted stocks slipped in 10 of the past 11 sessions, the best run for bears since December 2018, data compiled by Goldman Sachs Group Inc. and Bloomberg show.

Hedge Funds Reloaded Their Shorts Just in Time for a Tech Payday

The reward comes right after professional speculators recharged, boosting short sales on single stocks from a decade low reached in February. Their short book as a percentage of total equity exposure crept up over the last two months, rising roughly 2 percentage points to 26%, according to prime broker data compiled by Morgan Stanley.

Short interest is still far from a peak of about 35% that Morgan Stanley’s fund clients accumulated in 2018 and 2020. Still, it’s a victory for short sellers who had been driven almost into extinction as the S&P 500 rallied as much as 90% from the pandemic trough in March 2020, with all but two members climbing. Hedge fund managers bold enough to revive bearish wagers are now reaping gains after being stung by Reddit-driven short squeezes on GameStop Corp. and other meme stocks earlier this year.

Morgan Stanley did not specify what kind of stocks hedge funds are targeting, though a look at exchange-traded fund and futures trading shows growing distaste for technology, where stock losses are piling up as inflation concern puts pressure on their stretched valuations. Unprofitable tech firms are particularly vulnerable, having fallen 36% from their February peak as a group.

“The timing is coming from the fact that the pull-back in long-term rates that took place in April has come to an end,” said Matt Maley, chief strategist at Miller Tabak + Co. Short interest “is growing now, but it’s not back to extreme levels, so the hedge funds are less worried about getting squeezed. In fact, if the sector continues to fall, they’ll actually add to their shorts.”

Hedge Funds Reloaded Their Shorts Just in Time for a Tech Payday

Both the biggest ETF tracking the Nasdaq 100 and Cathie Wood’s ARK Innovation ETF experienced a spike in short sales in recent weeks. Large speculators in the futures market, mostly hedge funds, were net short Nasdaq 100 mini contracts for an 11th straight week, a stretch of bearishness seen only one other time since the global financial crisis, according to Commodity Futures Trading Commission data.

The strategy is paying off, at least for now. The Nasdaq 100 has dropped more than 5% from its April high. The reward is more pronounced among single stocks. Two-thirds of the stocks in Goldman’s most-shorted basket are down this quarter, led by electric-vehicle maker Workhorse Group Inc., which fell 44%, and solar company Sunpower Corp. with a drop of 38%. GameStop, which burned short sellers in January, has worked in bears’ favor as well, losing a quarter of its value.

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