Hedge funds are not the only ones benefiting from the short selling. Broadly, short sellers are up 2.8 per cent this year, data compiled by S3 Partners show, with bets against names like healthcare platform Agilon Health and real estate investment trust Medical Properties yielding the highest profits.
Increasing worry about everything from a conflict in the Middle East and rising 10-year Treasury yields to a mixed start to earnings season pushed investors away from stocks with shaky fundamentals and into companies with bullet-proof finances.
A quartile of Russell 1000 stocks with the highest debt relative to total assets – which include stocks like Hertz and Avis – is on pace for the worst month since August relative to a similar quartile with the lowest burden, data compiled by Bloomberg show.
“A recent rally had investors add longs to their books and cover short positions that weren’t working, but the moods have changed since then,” said Joseph Saluzzi, co-head of equity trading at Themis Trading. “The market looks like it’s setting up for some sort of downdraft, and when things head south, the weakest companies tend to fare the worst.”
Scepticism among hedge funds stands out in a market when others from retail investors to computer-driven traders have been mostly undeterred by the pullback. In the latest monthly survey from Bank of America, fund managers upped their allocations to US stocks to the highest level since late 2021.
Hedge funds are boosting shorts after such bets backfired during last year’s rally, at times adding fuel to the upside as they were forced to buy back stocks and cut losses. While the renewed interest may eventually set the stage for another squeeze, JPMorgan suggests the broad-money flows may not be bearish enough to trigger a contrarian signal.
The S&P 500 closed on Friday within 15 points of its all-time high reached on January 2022 and has since retreated almost 1 per cent.
“It’s not clear we’re out of the woods yet, and we still think the SPX could fall,” JPMorgan wrote, adding the drawdown may reach 5 per cent.
Bloomberg