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Short sellers boosted by ‘Hedge Fund Nirvana’ that sees most heavily-shorted


Hedge funds with long/short strategies have benefited in 2024 from a macroeconomic environment that has hit the most heavily shorted stocks particularly hard compared to their less shorted rivals, a new UBS report says. 

Previously, in the final two months of 2023, shares in the most heavily-shorted companies had actually outperformed their peers, a situation that had negatively impacted the returns reaped by hedge funds with long/short strategies. 

Now, this trend has reversed, in a shift that has seen stocks in the most highly-shorted companies suffer more than shares in less shorted companies since the start of the year, regardless of size or sector.

This turnaround has boosted hedge funds with long/short strategies in 2024 so far, by causing the most heavily shorted stocks to underperform relative to rivals, in a shift that has seen short sellers’ bets pay off. 

Analysts at UBS have now started referring to the current macroeconomic environment as a ‘Hedge Fund Nirvana,’ in reference to the Buddhist notion of paradise which marks an escape from the endless suffering experienced during the cycle of birth and rebirth called Saṃsāra. 

Heavily shorted companies including Marathon Oil
MRO,
-1.10%
,
Bath & Body Works
BBWI,
+0.79%
,
Best Buy
BBY,
+0.15%
,
Blackstone
BX,
-0.13%
,
Whirlpool
WHR,
-1.03%
,
Kroger
KR,
-0.07%
,
and Moderna
MRNA,
-6.67%
,
have all underperformed compared to less shorted companies, the UBS report shows. 

Less shorted stocks including Alphabet
GOOGL,
+2.12%
,
Amazon.com
AMZN,
+2.71%
,
Kinder Morgan
KMI,
-0.12%
,
American Express
AXP,
+0.60%
,
Eli Lilly
LLY,
+0.61%
,
General Electric
GE,
+0.17%

and Salesforce
CRM,
-0.22%

have, in contrast, outperformed their peers, in a shift that has also benefited long/short hedge funds. 

The most heavily-shorted stocks, including those listed above, have underperformed compared to their less shorted rivals.

The favorable macroeconomic switch has coincided with the emergence of more optimistic forecasts about the potential for sharper and faster interest rate cuts, the UBS report says. 

“Regardless of how much long/short managers might attempt to mitigate macro risk, there are environments that are simply more/less conducive to their process,” the UBS report says.  

“The YTD [year to date] underperformance of highly shorted stocks relative to less shorted names is a particularly favorable backdrop for hedge funds, and one likely to persist as long as economic reports remain robust.”



Read More: Short sellers boosted by ‘Hedge Fund Nirvana’ that sees most heavily-shorted

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