Short Sellers Lose $73 Billion Amid Market Rally to Start 2025

As the new year kicked off, short sellers found themselves on the losing end of a significant market rally, with losses totaling a staggering $73 billion. This sharp reversal in fortunes comes after a year marked by heavy losses for short sellers, who have been grappling with a bullish market and a resurgence in investor confidence.

The rally, which has left the S&P 500 index on track for its strongest month since July 2020, was sparked by a combination of factors. Chief among them was the perceived reluctance of the Federal Reserve to tighten monetary policy any further, following a series of rate hikes in 2024. This sentiment was reinforced by weaker-than-expected US consumer price inflation data released on Tuesday, which gave stocks a further boost.

The upswing triggered a brutal "short squeeze," in which hedge funds repurchased stocks to cover their negative bets, driving share prices even higher. This phenomenon, in which short sellers are forced to buy back the shares they have sold short to limit their losses, has been a significant factor in the recent market rally.



The past month's rally has been particularly painful for short sellers, with many funds suffering significant losses. According to data from S3 Partners, a financial analytics firm, short sellers incurred losses of $43.2 billion on US and European stocks between Tuesday and Friday last week alone. This marks a significant turnaround from the gains that short sellers had made earlier in the year, as the market had been more volatile and less bullish.

The losses have been particularly acute in certain sectors and stocks. For example, short sellers who had bet against technology, healthcare, and consumer discretionary stocks have been among the hardest hit. The share price of cruise line Carnival Corp, for instance, rose by 14% in the week to Monday, costing hedge fund short sellers a total of $240 million.

Meanwhile, heavily shorted Swedish real estate company Samhällsbyggnadsbolaget (SBB) rebounded by a third in the week to Monday, hitting funds including Samlyn Capital, Balyasny, and Arrowstreet Capital. Castellum, whose shares are shorted by Two Creeks Capital, Arrowstreet, and Fosse Capital, jumped 16% this month.

The fate of short sellers has shifted rapidly, and they are now facing a problem. As the market continues to rally, short sellers may be forced to cover their positions at increasingly higher prices, exacerbating their losses. This could lead to a vicious cycle, as the market rally feeds on itself, driving share prices even higher and making it even more difficult for short sellers to cover their positions.

However, it is important to note that short selling can still be a profitable strategy, particularly in a volatile market. By carefully selecting stocks and managing risk, short sellers can still make money, even in a bullish market. Moreover, the recent losses incurred by short sellers may present an opportunity for investors to buy stocks at discounted prices, as the market corrects and short sellers are forced to cover their positions.

In conclusion, the recent market rally has been particularly challenging for short sellers, who have incurred significant losses. However, the market remains volatile, and there are still opportunities for investors to make money, even in a bullish market. By staying informed and managing risk, investors can navigate the challenges posed by short squeezes and other market dynamics, and emerge as winners in the long run.