Traders who bet against stocks made a killing in 2022, as short sellers netted $300 billion

Traders who bet against stocks made a killing in 2022, as short sellers netted $300 billion

Traders on the NYSE floor, June 24, 2022.

Source: New York SE

According to S3 Partners, traders who have shorted stocks have made big profits in 2022.

Shorted stocks had a 30.8% return in 2022, said Ihor Dusaniwsky, the company’s managing director of predictive analytics. That means short sellers have outperformed the broader market, which has suffered its biggest losses since 2008 Dow Jones industry average, S&P500 and Nasdaq Composite lost 8.8%, 19.4% and 33.1% respectively over the past year.

US short sellers made $300 billion in mark-to-market profits at $973 billion on average short interest rates, Dusaniwsky wrote.

But even with the big win in 2022, short sellers are still lagging in recent history. Over the past five years, the average annual return for short sellers is down 4.4%, while the Dow is up 6.8%, the S&P 500 is up 9.3%, and the Nasdaq is up 12.5%.

How short positions have performed over the past 5 years

Dow Return (%) S&P 500 Return (%) Nasdaq Yield (%) Short Yield (%)
2018 -5.6 -6.2 -4.7 8.9
2019 22.3 28.9 35.2 -22.1
2020 7.3 16.3 43.6 -27.1
2021 18.7 26.9 21.4 -12.6
2022 -8.9 -19.4 -33.1 8/30
5-year average 6.8 9.3 12.5 -4.4

Source: S3 Research

When an investor sells a stock “short,” they are borrowing shares from a broker and selling them in the hope of later buying back the stock at a lower price. It’s a tactic that works best when the broader market is suffering. Short seller returns underperformed the major indices as the market rallied from 2019-2021, but outperformed the average when they ended 2018 in the red.

It’s worth noting that last year’s total short sales were below 2021, when it crossed the $1 trillion mark, but higher than in 2018-2020.

Short sellers would need to be good stock pickers in 2022 as well, as different sectors and individual holdings could produce wildly different results, Dusaniwsky said.

For example, the best sector to short last year was communications services stocks, which returned 56.7% on short positions. Energy was the worst, posting a 28% loss in short positions, S3 Partners said.

Short term and long term performance are usually reversed. That’s because investors tend to short stocks they expect to fall in value, so energy — the only winning sector in the S&P 500 in 2022 — wouldn’t be a target for shorting as investors are still keen to sell despite the fall in the stock market broader market would see stock values ​​rise.

And choosing a sector bias is “only half the battle,” given the diversity of stocks in each one. For example, in consumer staples Beyond meat had the largest return on short selling at 128.2%. Manufacturer of french fries Lamb Weston was the least profitable in its sector, losing 43.9%.

caravanwhich was crushed due to slowing used-car demand, had the best short performance of any stock with at least $100 million in short-term interest, posting a 377.6% gain.

on the downside, Madrigal Pharma the worst was too short. Bets against the company lost 345.4%. The stock rallied in December on well-received drug trial data.