Betting Against Tech?

According to Morgan Stanley, short sales on single stocks reached a decade low in February.  However, short selling book as a percentage of total equity exposure crept up over the last two months, rising roughly 2% points to 26%.

Short interest is still far from a peak of about 35% that Morgan Stanley’s fund clients accumulated in 2018 and 2020.

Morgan Stanley did not specify what kind of stocks hedge funds are targeting, though a look at exchange-traded funds 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.

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.

Reference

Bloomberg, 2021-05-11, “Hedge Funds Reloaded Their Shorts Just in Time for a Tech Payday”