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By Thyagaraju Adinarayan and Saikat Chatterjee
LONDON (Reuters) – Global bets worth billions of dollars could be at risk as amateur forex traders question the bearish positions of influential funds, inflating stock valuations and leaving traders looking for potentially heavy losses.
Gone are the days when bruised retail investors fled after leading hedge funds bet against a stock – the GameStop effect ripples through US markets and spills over into Europe.
The shares of the 20 small-cap Russell 2000 index companies with the biggest bearish bets against them have risen 60% on average so far this year, easily outperforming the rest of the market, according to Reuters analysis of the data Refinitiv.
Likewise, the best performing companies in Britain this week have been companies such as Pearson and Cineworld, in which investors also have significant short positions.
But stock price surges such as the 700% year-to-date jump at US video game retailer GameStop could potentially wipe out billions of dollars from those short bets.
Bets against GameStop alone amounted to more than $ 2.2 billion on Monday, according to FIS analytics data, amounting to more than a fifth of the company’s market value.
However, the company’s stock price has quadrupled since late last week, reaching as high as $ 340 in pre-market trading in the United States on Wednesday.
“Most short positions are funded on margins. And so when the markets bump into you, you’re shut down if you’re a short seller, ”said Kaspar Hense, a fund manager at BlueBay Asset Management, which manages $ 60 billion in assets.
“A short position can exaggerate your losses if you are not actively managing your position.”
Several traders told Reuters that one of the reasons for the rise in the price of some stocks is that short sellers are buying back the stocks to cover potential losses – the classic short-squeeze – drawing more retail investors into the market. hope to ride the wave.
Short sellers usually borrow stocks and sell them with a view to buying them back later when the price drops. The premium they pay to borrow the stocks reflects the demand for them.
All GameStop shares that could be borrowed are already on loan, with traders estimating annual borrowing costs to be 25% -50% of the company’s stock price.
Short seller Andrew Left, who runs Citron Research and is one of the big names behind betting against GameStop, shorted the stock when it traded around $ 40, expecting it to ‘it divides by two in value. He still has a short bet although he has covered the majority of the position with a loss of 100%.
Melvin Capital Management also closed a short position against GameStop at a loss of 100%.
GameStop isn’t the only short bet that has turned sour. BlackBerry, Bed Bath & Beyond, AMC, Macy’s and Cinemark Holdings have all grown 100% to 250% so far this year.
In Europe, Evotec, Nokia and Varta outperformed the larger market in 2021.
Refinitiv data on the performance of certain high short interest stocks
Company RIC YTD rise Short interest
GameStop 700% 100%
AMC Entertainment 400% 100%
Bed bath 110% 62.8%
BlackBerry 250% 35.8%
Dillard’s 100% 82%
Discovery 35% 34%
Chart: Smallcap Index Outperforms S&P 500 – https://fingfx.thomsonreuters.com/gfx/buzz/rlgvdgqqepo/Pasted%20image%201611745423311.png
(Reporting by Thyagaraju Adinarayan and Saikat Chatterjee; editing by Sujata Rao and Kirsten Donovan)
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