Ethel Jiang, 30 October 2018
Betting against some of this year’s best-performing tech stocks — the FAANG basket — has been a money-making machine during the brutal tech sell-off in October. Short sellers of FAANG stocks, or those investors betting against these shares, have seen $5.52 billion in mark-to-market profits since the beginning of the month, a return of 17.14% on an average short position of $32.2 billion, according to data from S3 Partners, a financial-analytics firm.
Since that time, the tech-heavy Nasdaq index has plunged 12%, in large part because of the FAANG stocks — Facebook (-13%), Apple (-6%), Amazon (-24%), Netflix (-26%), and Google (-15%).
But traders aren’t necessarily betting against names outright, some are doing it for hedging purposes, said Ihor Dusaniwsky, S3’s managing director of predictive analytics. “The five FAANG stocks are all in the top ten most shorted U.S. equities which indicates that there are more reasons to short these names besides pure Alpha generation on the short side of a portfolio,” Dusaniwsky said on Monday.
“While a portion of the short non-Alpha trading can be attributed to option and future hedging, most of the non-Alpha trading is related to portfolio Beta hedging.”
Dusaniwsky added that these short sellers could start to buy back FAANG stocks to cover their positions. “When tech rallies again, we will probably see short covering of a larger percentage of the October FAANG short selling activity as the notional dollar short interest increases,” he said.