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With the stock market a little jittery at the moment, Oracle CDS trading exploding and even AI insiders conceding that things have become a bit frothy, there’s growing interest in how, where and when to short things.
Luckily, Goldman Sachs’ latest report on hedge fund positioning contains a lot of interesting titbits. Alphaville’s main takeaway is that the so-called “smart money” isn’t quite yet ready to start shorting the big AI beasts, but some of them are sniffing around several of the weaker members of the herd.
First off, the median short interest in S&P 500 stocks remains surprisingly high after such a powerful rally. At the equivalent of 2.4 per cent of overall market capitalisation, shorting is at the 99th percentile relative to the past five years, and well above the long term average since 1995.
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Alphaville had already flagged the resurgence of short interest back in May, but it’s interesting that the level has edged up since then and remains elevated today — despite two small but painful short squeezes in July and again in mid-October.
Tellingly, the short interest in the tech-heavy Nasdaq 100 index is a smidgen higher, at 2.5 per cent. However, the biggest rise has happened in small-caps, with the median short interest in members of the Russell 2000 currently at 5.5 per cent.
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However, to us the most intriguing development is a surge in short interest in utilities.
A 0.3 percentage point increase in short interest to 3.2 per cent might not sound terribly exciting, but this is one of the highest levels ever recorded, according to Goldman Sachs.
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This is presumably as a proxy to the AI bubble. After all, the immense energy-intensity of data centres needed to fuel AI models has meant that normally boring utility stocks have begun to look a little racy.
Take American Electric Power, which is up over 31 per cent this year and is now valued at $65bn. Last month the utility increased its five-year capex plan from an already hefty $54bn to $72bn, largely to supply energy to data centres being built by the likes of Alphabet, Amazon and Meta. The short interest in its shares is now 4 per cent, according to Koyfin data, up from the 1-2 per cent range it has generally stayed in over the past decade.
So are individual utility companies the most popular overall short bets in Goldman’s dataset? No, given that the outright level of short interest is still modest relative to several other sectors (they’re still utilities after all).
Tesla once again makes an appearance at the top of the list of America’s most shorted companies, with JPMorgan an interesting/weird new entry at number four. But a lot of the other new members in Goldman’s basket of heavily-shorted stocks — in bold in the list below — can be fairly classified as either weaker AI players or exceptionally frothy AI-adjacent stocks.
Sorry for the bad resolution, but here’s a zoomable version of the list. For those that can’t be bothered to squint at it, Goldman tallied $5.4bn of shorts in Oracle’s stock, another $4.6bn in Intel, and $4.1bn in GE Vernova, which makes gas turbines for AI data centres, among the list’s new entrants.
Of course, a lot of these are huge companies, so as a percentage of market cap these short positions are often still small (1 per cent, 3 per cent and 3 per cent respectively). So what are the most heavily shorted stocks relative to their size? Luckily, Goldman has us covered:
Again, sorry for the image quality, but here is a zoomable version.
As you can hopefully see, the most heavily shorted stock in America with a market cap of at least $25bn is Bloom Energy, which FT Alphaville had already flagged as an example of markets reaching the “we’re going to be ruefully laughing at this in the future” stage of the boom. The rest of the list includes a lot of other FTAV faves, such as Strategy, CoreWeave, Coinbase, Live Nation, Robinhood, and Apollo.
It’s important to remember that Goldman’s hedge fund positioning report is only a delayed snapshot of the current state of things, albeit a pretty decent one (this report used the latest reported holdings of 982 hedge funds with $4tn of gross equity positions, of which $2.6tn is long and $1.4tn short).
It already looks like the US stock market has regained its footing from last week’s drama, and many hedge funds will be wary of shorting the AI hyperscalers given how bubbles can go on for longer than they can remain solvent. Indeed, Amazon, Microsoft, Meta, Nvidia and Alphabet are all the five most common long bets by US hedge funds tallied by Goldman.
But the uptick in short interest in utilities and a few of the weaker AI names indicates that some are beginning to dabble in and around what could be the industry’s next big short.
Read the full article here
