Hedge funds were targeted by Redditors last week with an army of retail traders igniting a short squeeze in GameStop (NYSE: GME), AMC Entertainment (NYSE: AMC), Blackberry (NYSE: BB), Bed Bath & Beyond (NASDAQ: BBBY) and several other of the market’s most shorted small cap stocks, sending them surging higher and forcing funds to cover their short positions.
And, to be sure, last week’s GameStop trade was a disaster for short sellers. By last Friday, short sellers had lost $19.75 billion on GameStop for the month of January alone, according to S3 Partners. For comparison, Tesla (NASDAQ: TSLA)—which has long been a hated stock that has defied bears with its market-crushing performance—cost short sellers around $40.1 billion in all of 2020.
The losses have hit funds that were shorting GameStop hard, including Andrew Left’s Citron Research, and Steve Cohen’s Point72.
Left, who said he was shorting the video game retailer’s stock when it was trading at around $40, said that he had largely abandoned the trade “at a loss 100%,” and covered the short when it rose to around $90 per share.
But while the frenzy left some funds down, it didn’t knock them out and many hedge fund stock pickers are still expecting to drum-up market-beating returns this year.
With rock-bottom interest rates, continued government stimulus, and ongoing vaccine rollouts, hedge funds are betting stocks will be pushed higher this year, with any near-term irrational exuberance from retail investors unsustainable.
The coronavirus pandemic drove volatility last year, making 2020 one of the best years in a decade for many equity hedge funds with several posting gains that more than doubled the S&P 500’s 18% total return and some tech-focused funds outpacing the Nasdaq’s 45% return.
For 2021, hedge funders are targeting some of last year’s best performers, shorting businesses that will be less robust once the world gets back to normal and people return to their pre-pandemic lifestyles. They’re also targeting industries that are likely to struggle as consumers’ tastes and behaviors change, including moving theater operators like AMC.
But if last week taught the market anything it’s that shorting can be risky. One example: Melvin Capital Management’s Gabe Plotkin lost 53% on his short bets in January amid the wild surge in retail trading.
Still, the epic melt-up in GameStop and other names last week is certainly appealing to short sellers. GameStop shares have fallen more than 70% so far this week. And an analysis of short stock positions by S3 Partners shows that short sellers aren’t done betting against GameStop – they’re just getting started.
“As soon as some shorts are covering there are a line of new short sellers looking to locate and short GME at these high stock price levels,” said S3 managing director of predictive analytics, Ihor Dusaniwsky. “Much like in trench warfare, after the first wave gets decimated, the second wave takes up the banner and marches onward.”
GameStop remains one of the market’s most shorted stocks with shares sold short more than 121% of the company’s total outstanding shares, according to S3.
All three stocks have risen sharply so far this year, with Virgin Galactic up nearly 131% year-to-date after gaining 101% in 2020, Dillard’s up 27% so far this year, and fuboTV up 82% since the start of the year.