A new golden age for short selling?
Hedge fund short sellers have hardly enjoyed the best of times during a decade or more of a seemingly never-ending bull market. This year their luck finally appears to have changed.
The best known tool of the hedge fund industry, and one of its most controversial, short selling is back in fashion, writes my colleague Laurence Fletcher. That is thanks to the end of what former Soros Fund Management investor Renaud Saleur, who now runs Geneva-based hedge fund Anaconda Invest, calls the “fantasy” market, or the “everything rally” that lifted both good and bad stocks with little differentiation during the coronavirus pandemic.
This year’s huge sell-off in the speculative technology sector has provided a wealth of opportunities for managers, with Goldman Sachs’ Unprofitable Tech index falling 60 per cent as rising interest rates make such companies’ future cash flows far less attractive.
Another area of opportunity has been the cryptocurrency sector, where bitcoin miners have become the latest target. Lossmaking Marathon Digital, for instance, is one of the most shorted stocks in the US market. The firm paid its former chief executive nearly $220mn in stock awards last year but since has then fallen well short of its mining and profitability targets.
Hedge fund managers say that their shorts have been delivering the best returns in years. But it remains a tricky business navigating vicious bear market rallies and rising stock correlations. Meanwhile “speculative technology” is no longer the obvious short that it was at the start of the year.
Short sellers made millions during the dotcom bust two decades ago and again betting against the banks during the 2007-08 financial crisis. If the current bear market turns out to be anywhere near as bad as Elliott Management or Saba Capital’s Boaz Weinstein have recently predicted, then short selling could be entering a new golden age.