In the wake of the stock market’s worst year since the Global Financial Crisis more than a decade ago, short sellers were able to turn a remarkable $300 billion profit in 2022, according to data from S3 Partners. While this was an impressive feat, it is important to understand how short sellers were able to achieve such returns and why they outperformed long-side investments.
How Did Short Sellers Make Money in 2022?
Short selling is a strategy used by investors who believe an asset’s price will decline. By borrowing shares from another investor, the short seller sells them at market prices with the expectation that they can buy them back at a lower price in the future. Thus, when the markets tumbled throughout 2022, many short sellers made profits as securities prices dropped. The S&P 500 tumbled 19.4% for the year and the Dow Jones Industrial Average fell 9%, giving shorts ample opportunity to capitalize on volatility. The Nasdaq Composite dropped 33%.
In addition to the broad indices, short-side returns outperformed against long returns of the S&P 500 and broader Russell 3000 indexes. However, short sellers slightly underperformed against technology stocks like those found on Meta (META), Alphabet (GOOG, GOOGL), Netflix (NFLX), and AMC Entertainment (AMC). This could be attributed to investors believing these tech stocks would continue their upward trajectory despite bearishness in other parts of the market due to uncertainty surrounding COVID-19 and other factors.
Overall, 2022 was a record year for shorts as profits reached unprecedented levels resulting from high volatility across all markets. Although some sectors outperformed others during this time period—most notably technology stocks—the overall trend favored those who chose to employ a short selling strategy over their long counterparts. As we enter 2023 and beyond, investors should keep this data in mind when developing their investment strategies and determining which type of approach will best suit their individual needs and risk tolerance levels.
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