Short sellers blame retail investors for worst returns since 2020

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Traders betting on runaway US stocks are blaming random retail investors for the worst year of returns in half a decade.

Basket of 250 US stocks Most popular with short sellers, stocks are up 57 percent this year, hurting traders betting that those stocks will fall, according to calculations by data group S3 Partners.

This represents the best performance for heavily shorted US stocks since 2020, when the basket rose 85 per cent. Shares of Bitcoin mining company Terawolf and car rental company Hertz, which went bankrupt in 2021, have risen 155 percent and 50 percent, respectively, this year. They both have more than 40 percent of their shares on loan. Short sellers typically borrow shares to sell, before buying them back later to profit from the decline.

The rally has come for unloved stocks artificial intelligenceThe hype and hopes for lower interest rates have pushed the S&P 500 to a string of record highs since the April selloff sparked by President Donald Trump’s “Liberation Day” tariffs.

The index made a partial rebound on Monday from Friday’s sell-off, sparked by Trump’s recent threats to impose tariffs against China, which has left it up 13 percent this year.

Driven by an influx of retail investor money, the rising tide caused huge losses to short sellers as they were squeezed out of their positions.

“Cycles have become so long and corrections so short that the demand for traditional short selling just isn’t there,” Carson Block, founder of short-selling firm Muddy Waters, told the Financial Times. He added that active short selling, which involves researching companies and publishing reports, was the only way to consistently make money by betting against stocks these days.

“Like all corrections these days, the emergence of risks is actually just an opportunity for BTFD (Buy a fucking dip)” Block said.

Prominent short sellers, including Hindenburg’s Nate Anderson and Jim Chanos, who bet against Enron before its 2001 collapse, have capitulated in recent years as U.S. stock markets have risen relentlessly, thanks in part to the growth of passive mutual funds, which buy entire indexes indiscriminately.

As a result, investors who make contrarian bets face an uphill battle.

“It’s been very difficult this year,” said Anne Stevenson Young, who co-founded long-term research boutique J Capital Research. “Since 2020, we’ve all been waiting for the market to become more rational, but it hasn’t. It’s gone up and up and up.”

“Retail investors are likely to ride the wave, whether the wave is justified or not,” she added.

Few companies capture the plight of short sellers better than AppLovin, a $200 billion advertising conglomerate whose shares have risen 65 percent this year despite accusations in several short reports that it overstated its AI capabilities. AppLovin strongly denied the accusations of financial and accounting improprieties, saying the reports had “absolutely no basis” and were “full of inaccuracies and false assertions.”

“Junk stocks have outperformed so dramatically this year that it has become impossible for anyone fishing on this side of the pond to succeed,” said a senior investor at a mid-sized US short seller.

“There have been severe consequences” for companies allegedly misbehaving, they added, referring to Trump’s pardon of Trevor Milton, the founder of electric truck maker Nikola, who was convicted in 2022 of lying to investors.

Milton said this week that he would “transform the aviation industry like it did the transportation industry” when he announced his “return” with aircraft manufacturer CyberJet.

“In the past, we had a cannabis bubble or a SPAC bubble, and that would have provided opportunities,” said the founder of a short-selling firm active in the US.

“Now, you have this kind of mania in multiple corners of the market. You have a cryptocurrency bubble, nuclear energy, anything quantum related to AI or data centers.

“For short sellers, there are fewer places to hide.”