Short Sellers Lose $44 Billion in 30 Days

Short sellers had a disastrous June:

Overall, U.S. short sellers are down -$44.49 billion in net of financing mark-to-market losses over the last thirty days.

The #1 source of short seller losses? AMC, by a wide margin, at $2.8 billion. AMC was also the #2 stock in the entire market in increased short exposure in June, a little behind Tesla, which has a market cap more than 25 times as large.

How can we describe this behavior by short sellers? Delusional? Suicidal? Or perhaps rational, given the incentives hedge funds are facing. Numerous funds are down heavily on bad bets against meme stocks. Once a hedge fund is well into the red, it has to make back its losses to even have a chance of earning its 20% performance fee. (That fee is collected only on gains over the capital invested.)

So, the deeper in the hole a fund gets, the more incentive it may have to make risky bets. Only a huge payoff on a volatile stock (like AMC) can get them back in the black, earning those sweet, sweet performance fees.

Unfortunately, this exposes investors who have already lost much of their capital to enormous risks. If I were an investor in a hedge fund that bet against meme stocks, which fortunately I am not, I’d pull my money out ASAP before they lose it all. It’s hard to make money shorting anything in such a hot market, but shorting one of the most popular stocks out there is a recipe for disaster.

The hedge funds were just lucky that June is a short month.

More on AMC:

HEDGE FUND TORCHED BY AMC

AMC + UFC = JACKPOT

AMC’S S-3 WITHDRAWAL: WHAT DOES IT MEAN?

Photo: “I’m scared too, but we’ll make it.” by qousqous is licensed under CC BY-NC-SA 2.0

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