Short sellers of US stocks hit hard by resilient market

New York

IN January 2014, veteran short-seller Bill Fleckenstein said that he was readying a new fund to bet on falling stock prices. He's still waiting to launch that fund.

Despite lacklustre US economic data, a world grappling with slow growth, concern that Greece and Ukraine could default on their debts, the US stock market has been more than resilient. Even after a selloff last Friday, major indices are less than 2 per cent from all-time highs and volatility measurements have been close to their lowest levels for 2015.

Outside of the hard-hit energy industry, most sectors have performed well over the last several months, and dedicated short funds have been stung.

Equity markets continue to benefit from ultra-low interest rates and other moves by central banks aimed at stimulating demand in major economies.

Through the end of March, Credit Suisse's index that measures the performance of short-biased funds is down 4.4 per cent, while its market-neutral index - measuring funds that match long and short bets - is off by 1.6 per cent. In comparison, CSFB's broad index of all hedge funds is up 2.6 per cent.

Since October, long-short equity funds - which take long positions in stocks expected to increase in value and short stocks expected to decrease in value - have been gravitating more to long bets than at any time since August, according to the Credit Suisse data. In particular, they have been pulling back on unprofitable short positions taken earlier in the year.

Investors who thought that oil prices were heading even lower after a big plunge in the second half of last year have also been hurt. The oil price has recovered some of its losses, and some oil company stocks have rebounded aggressively. The S&P energy sector is up 2.8 per cent so far in 2015.

Not every short bet has done badly, depending on the time they were put on. Electric car maker Tesla Motors remains a favourite of shorts, with 21 per cent of outstanding shares being shorted. The stock is down 27 per cent from its all-time high hit in September. But over two years, its 354 per cent gain has crushed the performance of the S&P 500, which is up 34 per cent in that time - so it's only those that recently took a short position in the car maker that have turned a profit.

The anticipation of higher rates as the Federal Reserve begins to unwind its ultra-loose monetary policy fostered expectations that the market would become more volatile. But the CBOE Volatility Index remains at relatively low levels, though it did leap last Friday as stock prices fell. REUTERS