BL: Shorting Profits Fade as Bets Against Banks Backfire (Update1)
By Lynn Thomasson
May 3 (Bloomberg) -- The biggest U.S. equity rally in seven decades is wiping out profits for stock-market bears who have yet to capitulate on bets against banks, retailers and casinos.
Hedge funds that profit from falling shares have seen 34 percent of their value evaporate since February 2009, according to Chicago-based Hedge Fund Research Inc. Zions Bancorp., Sears Holdings Corp. and Wynn Resorts Ltd., among the favorites of so- called short-sellers, caused the biggest losses as their shares more than tripled.
“Certainly there are things that we look at and, in retrospect, wish we had not been short,” said Doug Burtnick, who runs a long-short fund for Aberdeen, Scotland-based Aberdeen Asset Management Plc, which oversees about $240 billion. “There were a handful of companies that looked in early 2009 like they could very well be out of business, and those were also the ones where the stock prices rebounded very dramatically.”
The combination of record-low interest rates, first-quarter economic growth of 3.2 percent and analyst estimates for the fastest profit gains in 14 years erased 94 percent of the HFRI EH Short Bias Index’s advance from June 2007 to February 2009. The better news for bulls is that the percentage of New York Stock Exchange shares that remain shorted is higher than any time before 2008, providing more grist for gains should speculators be forced to retreat.
‘Face Ripped Off’
The 10 stocks with the most bearish wagers in April 2009 rallied an average 22 percent this year, data compiled by Bloomberg show.
“If you were short this market, you’ve had your face ripped off,” said Dan Veru, who helps oversee $3.1 billion as co-chief investment officer at Palisade Capital Management in Fort Lee, New Jersey. “Some investors clearly held onto their shorts too long.”
HFR data show funds focusing on both bullish and bearish equity speculation have gained 29 percent on average since March 2009, trailing the Standard & Poor’s 500 Index’s 47 percent surge. Long-short strategies made up 32 percent of hedge fund assets in the fourth quarter, an April 8 report from the research firm showed.
Those funds hold up better during retreats, helping them beat the market over time, said Charles Gradante, co-founder of advisory firm Hennessee Group LLC in New York. The HFR measure of long-short funds lost 29 percent in the last bear market, compared with the S&P 500’s 49 percent slump, monthly data show.
Downside Protection
“The market is due for a correction, and when the correction takes place, hedge funds will end up outperforming,” Gradante said. “The worst market for a hedge fund is a market that’s going straight up, and that’s what’s happening now.”
The S&P 500 remains 24 percent below its record 1,565.15 from October 2007. The gauge fell 2.5 percent to 1,186.69 last week, the most since January, as credit downgrades fueled concern Greece and Portugal will default. June futures on the index gained 0.3 percent to 1,186.60 as of 6:19 a.m. New York time.
Greece outlawed short selling on the Athens Stock Exchange until June 28 after the benchmark stock index fell as much as 18 percent this month. When the U.S. Securities and Exchange Commission banned those sales in almost 1,000 financial stocks from Sept. 19 to Oct. 8, 2008, banks, brokers and insurers in the S&P 500 fell 31 percent.
About 3.7 percent of NYSE shares have been borrowed and sold by traders hoping to profit by buying the stock back at a lower price, data from the exchange shows. Short interest fell 24 percent from the July 2008 peak as equities gained and investors repurchased shares.
“I haven’t really seen anyone looking to put on new short positions,” said William Byrne, director of trading for Conifer Securities LLC, which executes orders for more than 100 hedge funds in San Francisco. “You’d think there’d have to be some air to come out, but there’s still an underlying bid to the market.”
Bailing Out
Customers withdrew $177.5 million from funds that specialize in short strategies since March 2009, according to Morningstar Inc. They added $582.5 million during the bear market, data from the Chicago-based research firm show.
Investors speculated most against financial firms, retailers and restaurant operators, betting the highest unemployment rate in 26 years would hold down profits. More than 6 percent of shares in those S&P 500 industries were sold short, according to data compiled by Bloomberg.
That backfired as the economy recovered and the shares more than tripled. Gross domestic product may expand 3 percent this year and 3 percent in 2011, the median estimate of 64 economists surveyed by Bloomberg show.
‘Upside Down’
“It’s been tough because things are shorted upside down -- the worse the company is, the more it’s gone up,” said Harry Rady, who oversees $270 million and runs a long-short fund as chief executive officer of Rady Asset Management LLC in La Jolla, California. “I wouldn’t want to be a pure short seller.” Zions was the S&P 500’s 11th most shorted stock in April 2009 after losses in construction and commercial loans drove the shares down 93 percent in two years. The Salt Lake City-based lender reduced credit losses, spurring a 124 percent rally this year, the biggest in the index.
Bearish bets account for 19 percent of the bank’s shares available for trading, making it the seventh-most-shorted stock in the S&P 500, according to exchange data from April 15. Zions, which operates in 10 western U.S. states, posted its sixth straight quarterly loss on April 19. Analysts estimate it won’t be profitable until 2011.
Loaded for Bear
“The administration, the Congress and the Fed did everything they could to rescue the economy and helped the most the worst companies,” said John Burbank III, the chief investment officer of Passport Capital, a $2.8 billion hedge- fund firm in San Francisco. “It doesn’t make for a positive market” for short sellers, he said.
Investors are sticking to bearish bets on Sears, the largest U.S. department store operator, after the stock more than quadrupled since its November 2008 low. About 20 percent of shares in the Hoffman Estates, Illinois-based company were sold short on April 15, the fifth-most in the S&P 500. That compares with 27 percent a year ago, data compiled by Bloomberg show.
U.S. retail sales increased 1.6 percent in March, the most in four months, the Commerce Department in Washington said on April 14. A group of retailers, auto companies and hotel operators in the S&P 500 has beaten first-quarter profit estimates by an average 20 percent, the second-biggest margin among the 10 main industries.
Blackjack
Wynn was the eighth-most-shorted stock in the S&P 500 in April 2009 after plunging 91 percent during the credit crisis, according to data compiled by Bloomberg. The Las Vegas-based casino company founded by Steve Wynn has risen 473 percent since then, reducing the proportion of bearish bets to 9.9 percent of those available to trading. That cut its ranking to 50th.
“Big short interest is always a bullish indicator,” said Barton Biggs, who helps oversee $1.4 billion at New York-based hedge fund Traxis Partners LP and said he was buying stocks when the market bottomed. “There’s been bursts of short covering in the junk. By definition, in a big rally, short sellers are going to lose money. It’s really not much more complicated than that.”
To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.
Last Updated: May 3, 2010 06:36 EDT
