Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Short sellers are reaping huge gains this year as the brutal stock market carnage fuels their bearish bets.
According to data from S3 Partners’ Ihor Dusanivsky, the January shorting cohort has generated mark-to-market gains of $114 billion through Friday’s close, up 11.6% for the year.
The sell-off in the new year was fierce. The S&P 500 briefly dipped into correction territory on Monday, falling more than 10% from its record high. Technology stocks bore the brunt of the washout, with the Nasdaq Composite falling about 12% in January and now down nearly 15% from its all-time high. However, the tech-heavy benchmark managed an impressive turnaround on Monday, closing in the green after losing as much as 4.9%.
The stock market crisis was triggered by a possible change of course by the Federal Reserve. The central bank has announced interest rate increases this year, as well as tapering asset purchases and a balance sheet contraction. The potential action would mark an aggressively radical stance for the Fed after almost two years of ultra-loose monetary policy to support the economy before the pandemic.
“While longs have come under pressure, short sellers have seen widespread profitable trades in this market-wide downturn, with 79% of all funds on the short side generating profitable returns in January,” said Dusaniwsky, the firm’s managing director of predictive analytics.
Short sellers try to profit by anticipating falls in the value of securities. A short seller borrows shares of a stock and sells those borrowed shares to buyers willing to pay the market price. If the stock price falls, the trader would buy it back for less money and pocket the difference.
The most profitable short bet this year has been against Tesla, which is down almost 12%. Short sellers betting against the electric vehicle company have raked in $2.3 billion in mark-to-market gains as of Friday, according to S3.
Bets against Netflix were also particularly lucrative. The streaming giant’s shares have fallen a whopping 35% this year after the company admitted streaming competition is hurting subscriber growth. The drastic sell-off has resulted in a $1.6 billion gain for short sellers.