Halloween feels more like Christmas for short sellers as volatility returns, but longer-term trends will define shorting in 2021 and beyond

Halloween came early for investors this October as markets were spooked by a series of events that broke the relatively stable conditions of previous months.
A positive Covid-19 test result for President Trump at the beginning of the month sent shockwaves through global markets as investors tried to gauge what impact it would have on November’s US election.
In the UK, volatility spiked at the increasing prospect of a hard Brexit and the likelihood of a second nationwide lockdown, with the latter being confirmed on All Hallows Eve itself.

But for short sellers, it has felt less like Halloween and more like Christmas.
Our monthly analysis of FTSE 100 short positions shows a bumper month of profits in October, with short sellers netting £828m from the UK’s blue-chip index, compared to £543m in September and following a £420m loss in August.

The 5 most profitable FTSE 100 short positions in October were:

Rolls-Royce Holdings plc  £238,011,942
BHP Group  £152,638,866
Ocado Group plc  £81,982,561
Hargreaves Lansdown plc   £50,721,486
AstraZeneca PLC  £36,002,536


 The 5 least profitable FTSE 100 short positions in October were:

NatWest Group plc  -£6,825,359
International Consolidated Airlines Group, S.A.   -£10,252,522
J Sainsbury plc  -£16,347,374
Royal Dutch Shell plc  -£23,166,476
HSBC Holdings plc  -£27,467,597


The return of volatility to the market will be a welcome relief for the short selling community who have had a mixed 2020 so far, something we highlighted in a recent blog post. However, beyond short term price volatility, the pandemic is also accelerating a series of longer-term trends that short sellers will be seeking to capitalise on not just from month to month, but over the coming years and decades.

In a recent article for Securities Lending Times, I described how short-sellers are increasingly becoming the fact-checkers of capitalism as trust in traditional institutions, such as media and regulators, deteriorates. This was clearly exemplified by the Wirecard scandal earlier this year when short sellers were able to expose a $2bn accounting black hole in the firm which, up until that point, had escaped the attention of both regulators and auditors. The economic fallout from the pandemic is likely to expose similar cases, with one hedge fund manager predicting a “golden age of fraud”.

But the fact checker role will go beyond identifying illegal behaviour. The fundamental shifts brought about by the pandemic, driven by changing consumer behaviours linked to sustainability, climate change and new ways of working, will test the viability of even the most established businesses. Short sellers will have an increasingly important role to play in cutting through the noise and finding new ways to identify the winners and losers in the post-pandemic world.

As this shift takes place, the major blue-chip indices will offer a first indication of the direction of travel as constituents change and a level playing field emerges between the bulls and the bears. We’re already seeing signs of short sellers positioning themselves to take advantage of this transition – all other investors should take note.

FTSE 100 Short Interest by DTC

FTSE 100 Short Interest by DTC, weighted by market cap

By Peter Hillerberg, co-founder of Ortex Analytics