By Thyagaraju Adinarayan and Saikat Chatterjee
LONDON (Reuters) – Global bets worth billions of dollars may be at risk as amateur stockbrokers challenge the bearish positions of influential funds, inflating stock valuations and leaving traders looking at potentially heavy losses.
Gone are the days when injured retail investors fled after major hedge funds betting against a stock – the GameStop effect is spreading across US markets and spreading across Europe.
The stocks of the 20 low-cap companies on the Russell 2000 index with the biggest bearish bets against them have risen 60% on average so far this year, easily outpacing the rest of the market, shows a Reuters analysis of Refinitiv data.
Likewise, the best performers in Britain this week were companies like Pearson and Cineworld, in which investors also have considerable short positions.
But increases in stock prices, like the 700% jump in year to date at US video game retailer GameStop, can potentially wipe out billions of dollars from these short bets.
Bets against GameStop alone totaled more than $ 2.2 billion on Monday, according to data from FIS Analytics, equivalent to more than a fifth of the company’s market value.
However, the company’s stock price has quadrupled since the end of last week, reaching $ 340 in the American pre-market on Wednesday.
“Most short positions are financed at the margins. And therefore, when the markets go against you, you are prevented if you are a short seller,” said Kaspar Hense, fund manager at BlueBay Asset Management, which manages $ 60 billion in assets.
“A short position can exaggerate your losses if you are not actively managing your position.”
Several traders told Reuters that one reason for the jump in some stock prices is short sellers buying back the shares to cover potential losses – the classic short-squeeze – attracting more retail investors in hopes of riding the wave.
Short sellers usually borrow shares to sell them, with the aim of repurchasing them later, when the price drops. The premium they pay to borrow the shares reflects the demand for them.
All GameStop shares that would be available for loan are already on loan, with traders estimating annual borrowing costs at 25% -50% of the company’s share price.
Short-selling seller Andrew Left, who runs Citron Research and is one of the big names behind the bets against GameStop, sold the stock when it traded at around $ 40, hoping it would fall in half. He still has a short bet, although he has covered most of the position with a 100% loss.
Melvin Capital Management also closed a short position against GameStop with a 100% loss.
GameStop is not the only short bet that has gone sour. BlackBerry, Bed Bath & Beyond, AMC, Macy’s and Cinemark Holdings have all gone up between 100% to 250% so far this year.
In Europe, Evotec, Nokia and Varta outperformed the broader market in 2021.
Refinitiv data on the performance of some shares with high overdraft interest:
Company RIC YTD increase Short interest
GameStop 700% 100%
AMC Entertainment 400% 100%
Bed bath 110% 62.8%
BlackBerry 250% 35.8%
Dillard’s 100% 82%
Discovery 35% 34%
Chart: the smallcap index exceeds the S&P 500 – https://fingfx.thomsonreuters.com/gfx/buzz/rlgvdgqqepo/Pasted%20image%201611745423311.png
(Reporting by Thyagaraju Adinarayan and Saikat Chatterjee; editing by Sujata Rao and Kirsten Donovan)