The epic battle that ensued in GameStop Corp. (NYSE: GME)’s stock is not David’s fight against Goliath, and some in the media are playing it out. According to contemporary Michael Santoli of CNBC, hedge funds are far from the ‘almighty predators’ that make the short circuit to zero.
Selling short is not a profitable strategy
Overall, shorting is not only an expensive strategy due to the additional cost of borrowing stocks, but shorting has performed less well on the other hand, Santoli wrote for CNBC.com. Data from JP Morgan strategists last week found that a lot of pressure short trading over the past few years mostly matches the market as a whole.
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The data from BarclayHedge shows that the annual returns for equity long-term hedge funds over the past five years have ranged from minus 3% to plus 9%. Nevertheless, the S&P 500 index averaged 15% annually over the same period.
“If hedge funds could get market bullies with stocks they accumulate, why would they limit themselves to such meager rewards?” he wrote.
In the case of GameStop, there is ample reason to believe that hedge funds merely made a costly mistake of extending their hand too short to a short position and that they were exposed and vulnerable.
$ 50 billion in losses
Data from Ortex indicates short sellers with less than $ 50 billion since the beginning of 2021. Of course, this large number is the direct result of heavily shortened stocks that have caused an increase in buying spirit by Reddit traders.
Richard Repetto, analyst at Piper Sandler, calculated that GameStop and other stocks that dominated the media headlines over the past week accounted for about 4.6% to 7.6% of total U.S. consolidated stocks, Santoli wrote. In perspective, the same group of shares usually amounts to only 0.5% of the normal volume.
The volatility over the past week averaged 72.2% compared to the broader S&P 500’s 1.5% volatility.
No need to panic
Investors who expect the extreme volatility in a handful of heavily short-circulating stocks to wash out the broader market can sleep peacefully at night, Santoli continued. The total market capitalization of all stocks with a short-to-float ratio of more than 20% is only $ 40 billion, or a tenth of 1% of the total valuation of $ 40 trillion on the total stock market.
“And if we assume that the push-and-run game continues until the shorts evacuate the playground, it will lead to a market with even fewer short cushions, which is a headwind for stocks from an opposite perspective,” he writes. he.