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Hedge funds reloaded their shorts in time for a tech payday

(Bloomberg) – Short selling, a strategy that was as good as dead after the meme stock craze, is working pretty well right now. Hedge funds in particular seem to have timed the recent decline in tech stocks almost perfectly. just before the market rolled over, bearish bets were raised. A basket of the 50 most short stocks slipped in 10 of the last 11 sessions. This is the best run for bears since December 2018. Data compiled by Goldman Sachs Group Inc. and Bloomberg single stock sales from a decade low in February. According to prime broker data compiled by Morgan Stanley, their short book as a percentage of total equity exposure rose around 2 percentage points to 26% over the past two months. The brief interest is still far from a high of around 35% Morgan Stanley’s fund clients have amassed in 2018 and 2020. Still, it’s a win for near-extinction short sellers when the S&P 500 caught up to 90% from the pandemic bottom in March 2020, all but two members climbing. Hedge fund managers brave enough to revive bearish bets are now reaping profits after breaking Reddit-powered short squeezes on GameStop Corp. earlier this year. and other meme stocks got stung. Morgan Stanley hasn’t specified what type of stocks hedge funds are targeting, though a look at trading exchange-traded funds and futures contracts shows a growing aversion to technology, which is mounting stock losses as inflation concerns put pressure on their stretched valuations exercise. Unprofitable tech firms are particularly at risk as they are down 36% as a group from their February high. “The timing stems from the fact that the fall in long-term interest rates that happened in April has come to an end,” said Matt Maley, chief strategist at Miller Tobacco + Co. Short interest “is growing now, but it is not back to extreme levels so hedge funds are less concerned about being squeezed. If the sector continues to decline, they will actually add to their short positions. “Both the largest ETF tracking the Nasdaq 100 and Cathie Wood’s ARK Innovation ETF have seen spikes in short selling in recent weeks. Big speculators in the futures market, mostly hedge funds, were net short Nasdaq 100 mini-contracts for an eleventh straight week. According to the Commodity Futures Trading Commission, this has only been seen one more time since the global financial crisis. The strategy is at least pay off for the moment. The Nasdaq 100 is down more than 5% from its April high. The reward is more pronounced for individual stocks. Two-thirds of the stocks in Goldman’s most truncated basket are down this quarter, led by electric vehicle maker Workhorse Group Inc., which fell 44%, and solar company Sunpower Corp. with a decrease of 38%. GameStop, which set short sellers on fire in January, also championed bears, losing a quarter of its value. More articles like this can be found at bloomberg.com. Sign up now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP

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