Short-Selling Hedge Funds Feel the Squeeze with $43 Billion in Losses Amid Market Surge

The recent surge in stock markets, particularly noticeable in the growth of the S&P 500, which is poised for its strongest month since July 2022, has proved to be a difficult period for hedge funds that specialize in short selling. The surge has inflicted substantial losses on these funds, cumulating to around $43 billion in just a week.

Insights provided by S3 Partners reveal a stark picture for hedge funds engaged in short selling from Tuesday to Friday of the previous week. This period saw losses piling up to $43.2 billion, this is regardless of the potential profits these funds might have amassed from other areas within their stock portfolios.

Some of the most notable stocks that caused heavy losses for short sellers included Tesla (TSLA) with a $909 million hit, Apple (AAPL) with close to $484 million in losses, and Intel (INTC).

November's Remarkable Market Performance

The S&P 500 index has seen an impressive uptick, climbing nearly 9% in the span of this month alone. This rise has caught short sellers off guard, as they had anticipated further declines following the index's dip into correction territory, where it tumbled almost 11% from late July through the end of October.

The rebound has been even more pronounced since October 27, with the SPDR S&P 500 ETF (SPY) — an ETF tracking the broader market index — soaring by about 11%. Short sellers who had bet against companies burdened by heavy debt, believing these to be vulnerable to rising interest rates, found themselves wrong-footed by the market's unexpected turnaround.

Recent signals suggest the Federal Reserve might soften its policy stance earlier than anticipated, giving the markets reason for optimism. The latest inflation data has also indicated that inflation is easing more rapidly than forecasted, contributing to the bullish run which left short sellers scrambling to cover their positions.

Major Companies Hit Short Sellers Hard

The effects of the market rally were further highlighted by the performance of the Goldman Sachs' Very Important Short Position ETF, which comprises the 50 S&P 500 companies with the largest short interest. This ETF is on track for its best performance since October 2022, suggesting a significant reversal of fortunes for short-sellers.

Some other companies that proved costly for short sellers include the cruise line operator Carnival Corporation (CCL), which burned short sellers for approximately $240 million, and Blackstone Group (BX), which added $269 million to their tab of losses.

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