Hedge funds betting against US technology stocks have been battered by $18bn of losses after Big Tech’s robust earnings fuelled a sharp rebound in the sector.
Crispin Odey and James Hanbury are among the hedge fund managers burned by a 16 per cent rally in the Nasdaq Composite this year, as a number of stocks with high levels of bets against them defied pessimistic expectations.
Microsoft and Meta this week were among those producing better-than-expected earnings, extending a powerful stock market rally that has been narrowly focused on a handful of giant tech concerns. The latest gains left the combined market value of the five biggest tech companies $1.9tn higher on the year, a gain of 31 per cent.
The reversal in fortune comes after a difficult period in 2022, when rising interest rates caused a flight from high-growth companies. At the same time, pressure on Big Tech’s core markets like IT spending and digital advertising weighed on the sector, prompting many tech firms to make sweeping job cuts.
“The tech sector rally has caused significant losses for short sellers”, said Peter Hillerberg, co-founder of data group Ortex, which calculated the $18bn of total losses.
Tesla, whose periodic strong rallies have long been a source of pain for short sellers, hit speculators again this year as its stock surged 33 per cent.
Negative or so-called short bets, largely by hedge funds, account for 2.1 per cent of shares in Tesla, up from 0.87 per cent at the start of this year, according to S&P Global Market Intelligence.
Bets against Tesla accounted for 0.4 percentage points of losses at Crispin Odey’s European fund and 2.19 percentage points of losses at Hanbury’s Brook Absolute Return fund in the first quarter, according to investor documents seen by the Financial Times.
Meanwhile, shares in Meta Platforms, where short bets hit a recent peak of 0.6 per cent of the company, have nearly doubled. Odey European’s bet against Meta Platforms accounted for 0.7 percentage points of losses.
Many technology stocks, including those with meagre profits, posted huge gains during the early stages of the coronavirus pandemic, as ultra-low interest rates made the companies’ future cash flows more appealing to investors. Then a surge in inflation in 2022, and aggressive interest rate rise to tame it, sent those share prices into reverse.
While most of the high-growth stocks that led the pandemic-era tech rally remain far below their peaks, a narrower tech rebound has set in at the biggest, most profitable companies. A strong rebound in semiconductor stocks, despite little evidence yet that the sector is recovering from a cyclical trough, has also taken many investors by surprise.
With inflation proving stubbornly high, many managers had anticipated this sell-off in tech stocks would continue this year. But turmoil in the banking sector, sent the two-year Treasury yield falling at its fastest pace since 1987, as investors hunted for safety and positioned for a cut in interest rates, pushing tech stocks back up.
“We wished we had read our last quarterly newsletter a bit more closely as short-term inflation expectations did continue to fall quite dramatically which helped longer-duration assets in the quarter,” wrote Hanbury, referring to assets such as tech stocks, in an investor letter seen by the FT.
Hedge funds that shorted semiconductor stocks have lost $8bn so far this year, according to Ortex, while investors who bet against technology hardware and storage businesses lost $4.6bn. Bets against other parts of the US tech industry amount to more than $5bn.
Par Technology, which provide professional services software, is among the most shorted stocks, with 21 per cent of its shares on loan, according to S&P Global Market Intelligence. However, the company’s share price has jumped 15 per cent this year.
Hanbury, who made big gains last year from short positions, told investors that he had pared back his short bets before the start of the year, which had limited losses.
He removed his bet against Tesla entirely following the losses this year, while he also lost money betting against the performance of Cathie Wood’s Ark Innovation exchange-traded fund. Ark, which counts Tesla and Zoom Video Communications among its largest holdings, is up 12 per cent since the start of the year.
Other investors are turning more bullish on US tech in a sign that sentiment towards the industry is changing. Tech stocks recorded the biggest inflows in three months last week, with hedge funds leading the charge over other investors, according to Bank of America.
Stephen Yiu, manager of the Blue Whale Growth fund, said: “We are still backing tech companies, but on a highly selective basis. The stocks we sold out of last year . . . like Amazon and Google have recovered, but we don’t believe their prospects are much better over the medium-term.
“What we’ve still got is Microsoft and Nvidia and semiconductors like ASML, which have done pretty well. So to say tech has gone as an opportunity is the wrong conclusion, but we expect a divergence in tech companies’ performance over next couple of years.”
Odey Asset Management did not respond to a request for comment.
This article has been amended after publication to correct the spelling of Ortex’s name