Short sellers crushed in 2020 as Tesla, Moderna stocks soared

SHORT sellers won some high-profile victories this year with the collapse of payments firm Wirecard AG and hospital operator NMC Health Plc. Otherwise, 2020 is shaping up to be the worst year on record for some investors seeking to profit from share price declines.

A monthly index of short-selling hedge funds is down 32 per cent this year through October, according to data provider Hedge Fund Research (HFR). The performance is unlikely to have improved in November, given that European stocks posted their biggest-ever gain last month while the S&P 500 Index set a record.

The short funds index had its biggest monthly gain ever in March when global markets plunged because of the Covid-19 pandemic, according to HFR's data going back to 2005. Still, returns were quickly wiped out when stock prices came surging back.

Regulators in some countries banned short sales, governments stepped in with economic rescue packages and central banks flooded the markets with liquidity. The rally accelerated last month after drugmakers reported success in developing novel coronavirus vaccines.

"The money flows into the market means fundamental shorts have been very challenging," said Mark Hiley, founding partner of The Analyst Research. "Despite the big selloff in March it was almost impossible to reposition and then in November the market took everyone by surprise despite the vaccine being expected at some point."

Betting against Tesla

This year has been especially difficult for those who are bearish on Tesla, a favourite of individual investors. The stock, the subject of a years-long battle between sceptics and believers in CEO Elon Musk's vision, has soared over 600 per cent in 2020. The car company's market value is hovering around US$600 billion, and it will crown the year by being added to the S&P 500 on Dec 21.

"It's been painful, clearly," veteran short seller Jim Chanos, who has been betting against Tesla for five years, said in a Bloomberg "Front Row" interview.

The biggest short bet in the biotech sector, US vaccine developer Moderna, also punished bears - the shares are up more than 700 per cent in 2020, with the company on the verge of winning regulatory approval for an inoculation against the novel coronavirus.

Investors in Europe have pared back their short positions in Ocado Group as the pandemic fuelled a surge in demand for online grocery shopping, as well as in Deutsche Bank on renewed confidence in the lender's turnaround strategy. In the US, personal styling company Stitch Fix has benefited from retail stores closing.

Chinese companies, many of them listed in the US, also have surged even as bearish bets mounted. Carson Block, who made a name for himself targeting China-linked businesses, bet against education company GSX Techedu in May and its shares are up 83 per cent since.

Peer TAL Education Group, in which Mr Block announced a short position in 2018, is up 42 per cent this year. Streaming service Joyy Inc, meanwhile, is down 15 per cent since Mr Block's short wager last month, paring year-to-date gains to 62 per cent.

Solar-power companies, a favourite sector for bears, also have been swept along in the rally fuelled by rock-bottom interest rates and a frenzy among individual investors. Shares of US-listed companies Enphase Energy, SolarEdge Technologies and JinkoSolar Holding have more than doubled this year.

Pandemic-hit firms

To be sure, there was plenty of money to be made by betting against the companies that were hardest hit by the pandemic. Cinema operators Cineworld Group and AMC Entertainment Holdings, carriers Deutsche Lufthansa and American Airlines Group as well as department-store chain Macy's have all slumped in 2020.

And so-called activist shorts like Mr Block, who noisily target companies that they allege to have dodgy business or accounting practices, won big on Wirecard and NMC. Wirecard in June filed an application for insolvency proceedings after revealing that 1.9 billion euros (S$3.1 billion) of cash was missing. Middle East hospital operator NMC collapsed after uncovering US$2.7 billion of hidden debt in March and saying that fraud apparently occurred.

Meanwhile, electric-truck developer Nikola Corp's stock price hasn't recovered following a short-seller report in September. The company has rejected allegations that it misled investors about its capabilities and progress in developing vehicles.

Brutal month

November was a particularly brutal month for short sellers, with stocks that had performed the worst year-to-date rallying the most, while stocks that had done the best either "treaded water" or went down slightly, said Barry Norris, who runs Argonaut Capital Partners.

The firm's Absolute Return Fund, which goes both long and short, has returned 15 per cent this year, though has declined 10 per cent in the past month, according to Bloomberg data.

Even so, 2021 may turn out to be a better year for short sellers, with Mr Norris predicting the current market exuberance likely fading early in the new year.

"A lot of these companies that have rallied a long way and in many cases have regained all their Covid losses are still in quite a big hole with pretty limited growth prospects, loads of cash burn, and not much scope for certainty to exceed investors' expectations," he said. "While in general this quarter will have been pretty difficult for all short sellers, I can see some great opportunities ahead in individual stocks." BLOOMBERG