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Hedge Funds Show Strong Bearish Sentiment with Hefty Short Positions Amidst Market Sell-Off

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Hedge Funds Increase Bearish Bets on Stocks Amidst Market Sell-Off

Market Pressure and Weakening Indexes

As the broader market experiences a sell-off, certain stocks are drawing more attention. Wall Street has been under pressure due to the anticipation of higher interest rates, resulting in a dampening effect on equities and a weakening of major indexes. September has proven to be a challenging month for the S&P 500, Dow Jones Industrial Average, and the Nasdaq Composite, with all three on track to shed significant percentages.

Hedge Funds' Short-Selling Strategy

In response to these market conditions, hedge funds are increasing their bets by shorting a range of stocks, including C3.ai and U-Haul. Short-selling is a trading strategy that allows investors to profit from declining stock prices. Investors borrow shares and sell them at the current price, with the intention of buying them back at a lower price in the future, pocketing the difference.

Examining the Most Shorted Stocks

To gauge the extent of short positions, one can look at the relative float of these stocks, which represents the number of shares available for public trading. C3.ai stands out with one of the highest short-interest readings, reaching 39.2 million shares as of September 15, up from 35.9 million at the end of August. The stock, which initially benefited from the hype around artificial intelligence, has experienced a steep decline of 20% in September alone. Investors have recently raised concerns about the company's potential gains from the AI trend.

Short Interest in Other Stocks

Clothing brand Guess also made the list, with a short-interest reading of 8.3 million shares in mid-September, representing approximately 13% of the company's overall float. U-Haul, a moving, truck rental, and storage company, saw a significant 5% rise in short interest to around 2 million shares, equivalent to approximately 26% of the company's float. Other stocks on the list include Intercept Pharmaceuticals, which experienced an 18% increase in short interest from the end of August to mid-September, totaling 12 million shares or about 26% of the company's float. However, the potential risks of a short strategy were evident as shares of Intercept Pharmaceuticals surged after the announcement of its acquisition by Italy's Alfasigma, offering shareholders an 80% premium. Vehicle sales firm Carvana, insurance company Lemonade, and coupon company Groupon also made the list of stocks with significant short interest.

Implications of Increased Bearish Bets by Hedge Funds on New Business Formation

Market Conditions and Hedge Funds' Response

The current market sell-off, coupled with the anticipation of higher interest rates, has placed significant pressure on Wall Street. This has led to a weakening of major indexes such as the S&P 500, Dow Jones Industrial Average, and the Nasdaq Composite. In response to these conditions, hedge funds are increasing their bearish bets by shorting a range of stocks. This strategy, which profits from declining stock prices, could potentially impact new businesses seeking investment.

Short-Selling Strategy and Its Impact

Hedge funds' short-selling strategy involves borrowing shares and selling them at the current price, with the intention of buying them back at a lower price in the future. This approach, while profitable in a declining market, could potentially deter investment in new businesses. Investors may be more inclined to short established stocks rather than invest in new ventures, particularly in sectors represented by the most shorted stocks.

Most Shorted Stocks and Potential Risks

Among the most shorted stocks are C3.ai and U-Haul, both of which have seen significant increases in short interest. However, the short-selling strategy is not without risks, as demonstrated by the case of Intercept Pharmaceuticals. Despite being heavily shorted, the company's shares surged following the announcement of its acquisition by Italy's Alfasigma. In summary, the current market conditions and the increasing prevalence of short-selling by hedge funds could potentially impact new business formation. New businesses need to be aware of these trends and consider them when seeking investment and planning their growth strategies.
Story First Published at: https://www.cnbc.com/2023/09/28/hedge-funds-are-betting-against-these-stocks-the-most-in-this-sell-off.html
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