Traders on the NYSE, June 24, 2022.
According to S3 Partners, traders short of stocks won big in 2022.
The short-sold stocks have a return of 30.8% in 2022, said Ihor Dusaniwsky, managing director of the company’s predictive analytics division. That means the short-sellers outperformed. Compared to the broader market, the market suffered its biggest loss since 2008. Dow Jones Industrial Average, S&P 500 and Nasdaq Composite down 8.8%, 19.4% and 33.1% respectively last year.
U.S. short sellers, Dusaniwsky wrote, made $300 billion in market-based profits on average short-term interest of $973 billion.
But even with a big win in 2022, short sellers are still lagging behind recent history. Over the past five years, the average annual return for short sellers has been a loss of 4.4% while the Dow is up 6.8%, the S&P 500 is up 9.3% and the Nasdaq is up 12.5%.
The source: Research S3
When an investor sells a “short” stock they borrow shares from a broker and sell them in the hope of buying them back later at a lower price. It’s a tactic that works best when the broader market is hurting. Short-seller returns were lower than major indexes as the market rallied between 2019 and 2021, but beat averages as they ended the year down in 2018.
It’s worth noting that the total amount shorted last year was lower than it was in 2021, when the $1 trillion threshold was broken, but higher than it was between 2018 and 2020.
Short sellers still need to be good stock pickers in 2022 because different sectors and individual holdings can produce very different results, Dusaniwsky said.
For instance, the best sector for short selling last year beat media services stocks, delivering a return on short holdings of 56.7%. Energy was the worst and posted a 28 percent loss on short-sold holdings, S3 Partners said.
Short-term and long-term performance are often contradictory. That’s because investors often short hold holdings they think will lose value, so energy – the only sector to win the S&P 500 in 2022 – will not be a target for selling. short as investors see stock values rise despite broader market declines.
And choosing a new industry direction is “half the battle” given the diversity of stocks in each industry. For example, in consumer staples, other than meat had the biggest profit when short selling at 128.2%. french fries maker Weston lamb had the lowest profit in its field and lost 43.9%.
On the other hand, Madrigal Pharmaceuticals is worst to short. Bets on the company lost 345.4%. Stocks rallied in December on well-received drug trial data.