Normal Returns

Last week I wrote about the changing seasons across global markets as investor optimism soared in response to the Biden victory and the positive results emerging from the initial tests of the Pfizer Biontech vaccine.

Fast forward seven days and that change in seasons may have felt more like an extreme weather event for short sellers as further positive vaccine news emerged and markets once again were buoyed by rising investor confidence.

After one of the most challenging years on record, it is clear that November 2020 will be seen as a turning point in society’s fight against Covid-19, but it will also be a milestone for short sellers who -after a rollercoaster year of wildly fluctuating returns – can once again revert to the investment strategies they know best.

According to our analysis, US short positions are down by $100bn in the first two weeks of November with shorts against FTSE 100 companies $1.6bn in the red over the same period. In a continuation of the theme we discussed last week, travel and tourism stocks continue to lead losses whilst “work from home” stocks bring some balance to the equation.

No doubt a bruising month for many, but also not a surprise for those of us who follow shorting activity closely. Interspersed with hugely profitable months, there have been several periods during the pandemic where short sellers have been in the red, and similarly many bets that have turned sour over that period.

I wrote recently how the scale of government intervention around the world may have created a dampening effect, preventing short positions from realising their full or intended value. We have also put a spotlight on sector bets that have been anything but one-way traffic; whether UK supermarkets, European travel or US tech stocks, 2020 has been far from plain sailing for short sellers.

Whilst the reasons why short sellers haven’t been able to consistently generate returns during this period are complex and many, we should all keep in mind that short sellers are often not always the short-term opportunists that the public consciousness might believe. For many, trying to capitalise on short-term, macro-led, momentum-based bets will be as far away from their comfort zone as it is for any traditional long-only investor.

So far in 2020, that approach has been the only one available, but November marks the beginning of the end of the pandemic, and with that comes the potential for many short sellers to revert to their preferred investment styles. They can now re-open their toolbox, dust down their long-term strategies and go back to a style of investing that seeks consistent performance rather than the dramatic fluctuations we’ve seen so far this year.  As normality returns, short sellers may find they are once again able to make normal returns.

By Peter Hillerberg, co-founder of Ortex Analytics