While not a new trend within the investment space, short selling—or short interest— activity has gained momentum in recent times. In the second quarter of 2024, U.S. and Canadian markets saw an increase of nearly $58 billion in short interest, or an increase of 5.1% from the previous quarter.
During periods of market volatility, short selling is more pronounced, capable of yielding significant gains—or exacerbating exposure and generating losses on the other end. Short selling has undoubtedly drawn interest from institutional and retail investors alike, especially in the last few years.
It has also prompted regulatory intervention, with new reporting requirements issued by the Securities and Exchange Commission (SEC) in an effort to provide transparency and ensure the availability of short position data from investment managers.
Below, we explore recent implications and trends in short selling, the companies and industries seeing the most activity, recent market events triggering regulatory intervention, and insights from industry experts on where opportunities may exist for asset managers. Market intelligence platforms like AlphaSense help investors keep a pulse on market trends and drive smart decision-making.
Understanding Short Selling
According to the SEC, short selling involves the sale of a security that the seller does not own or a sale that entails the delivery of a security borrowed by the seller. In order to deliver the security to the purchaser, the short seller borrows the security, usually from a broker or an institutional investor, and later closes out the position by purchasing securities to return to the lender. Short selling is used to profit from expected downward price movements or to hedge the risk of a long position in the same security.
Top Short Interest Trends in 2024
According to a report from S3 Partners, the sectors that saw the largest increases in short exposure for Q2 2024 included information technology with an increase of $49.3 billion, communication services at $11.2 billion, and utilities up $3.7 billion from the prior quarter. The sectors with the largest decrease in short exposure for the quarter were in the energy and financial sectors, down $12.3 billion and $1.6 billion, respectively.
Earlier in the year, a surge in Nvidia stock left short sellers with about $3 billion in losses, referring to it as an “AI-generated nightmare” after the chip producer’s earnings surge sparked a rally. With nearly $40 billion in short interest, Nvidia is one of the most shorted stocks around, and also recently surpassed Microsoft to become the world’s most valuable company.
In July 2024, Tesla short sellers lost nearly $3.5 billion with news that the electric car maker had a better-than-anticipated deliveries report for Q2 2024. In the two days following their earnings release, Tesla’s stock rallied 17%. Short sellers have felt the crunch for several months, with Tesla stock rising 73% from its low in April.
Similarly, Microsoft Corp and Apple also remain at the top of the list as heavily shorted stocks. Microsoft’s short interest hovers around $24 billion, while Apple is not far off at $23.7 billion.
A search for “short interest” on the AlphaSense platform indicates a heightened trend in document activity over the last 90 days.
Regulatory Intervention Following Heightened Scrutiny
Following recent market events, including the run up of GameStop and AMC stocks in 2021, the SEC announced regulation in October 2023 requiring investors to report their short positions.
These new rules came after increased scrutiny of short selling, in particular as a response to the ‘meme stock’ saga. When retail investors banded together to drive up the stock prices of GameStop and AMC stocks, hedge funds that shorted the companies incurred significant losses, having to repurchase shares at skyrocketed amounts in order to close out their short positions.
Beginning in 2025, the SEC’s new Rule 13f-2 and the new Form SHO will require asset managers to disclose information about their short positions that exceed certain reporting thresholds:
- An average of daily gross short positions with a value of $10 million or more, monthly
- An average of daily gross short positions of 2.5% or more, monthly
- A gross short position in non-reporting issuers exceeding $500,000 or more, monthly
With an increase in short selling trends and heightened scrutiny, investors can anticipate ongoing regulatory involvement in the coming years to ensure transparency and data disclosures.
Industry and Expert Perspectives on Short Selling
Perhaps surprisingly, many economists actually support short selling and believe it is good for markets. Studies find that it tightens spreads, enhances liquidity, and improves the accuracy of valuations. It is also believed to make markets more efficient at allocating capital, lowering capital costs for companies, and minimizing trading costs for investors.
Academic research findings also largely favor the presence of short selling. A large study conducted on 111 global stock exchanges titled “The World Price of Short Selling” was a joint research venture between faculty from Vanderbilt University and Cornell University. Their findings were unanimous:
“We find that there is no difference in the level of skewness and co-skewness of returns, probability of a crash occurring, or the frequency of crashes, when short selling is possible and when it is not.”
Furthermore, findings from the study suggested that the availability of short selling lowered the volatility of aggregate stock returns and resulted in higher, consistent liquidity. In countries where short selling was not viable, a correlation with lower market quality existed in those instances.
In an expert interview sourced from the AlphaSense platform, a former executive director at a leading hedge fund believes that short positions can be beneficial for asset managers to offset significant gains and delay tax implications:
“As long as you have enough short positions that generate losses, that will offset the gain triggered by the sale of the stock. Since the gains are not trued up until the end of the year, you could do this for a year, starting in January and then you continue through the year.
Basically, you unwind little by little so that you’re creating more and more positions that are moving in the opposite direction of the gains in the stock through the short side. What you’re doing is while you’re unwinding the position, generating gains, you’re also creating losses from the model and generating losses. At the end of the year, you can make it so that you would not have generated any capital gains at all.”
– Former Executive Director, AQR Capital Management | Expert Transcript
Overall, these industry expert perspectives highlight the potential opportunities and benefits that may arise from rising trends in short selling for asset managers to enhance their investment strategies.
Stay Ahead of Market Trends with AlphaSense
To stay ahead of the market-moving events and trends making the greatest impact on the investment landscape, asset managers need a trusted resource that delivers intelligence and insights with the speed of the changing market.
AlphaSense’s leading AI-powered market intelligence platform is trusted by 80% of the world’s top asset management firms to streamline trends, insights, and data that drive efficient workflows. Our premium content library contains more than 10,000 documents on private and public companies, providing crucial market intelligence in a fraction of the time it would ordinarily take. With a simple keyword search on ‘short interest’ in the AlphaSense platform, you can:
- Create a customized dashboard or set up email alerts to be notified of company document and regulatory filings as they happen
- Get a pulse on short selling trends with mentions in AI-generated company earnings transcripts and aftermarket research from 1,500+ sell-side and independent firms, covering a breadth of companies, industries, and themes.
- Tap into expert perspectives on the topic with access to 45,000+ expert call transcripts, offering exclusive first-hand insights that are difficult to locate anywhere else.
- Leverage Keyword Search and Smart Synonyms™ to expand thematic searches and deliver the most relevant results on the topic
Streamline your research workflow, gain the competitive edge, and surface new opportunities with AlphaSense. Start your free trial of AlphaSense today.
Financial Research Leader
Barb is a Financial Research Manager covering the financial services segment at AlphaSense. Previously, she managed the content program at a global financial services firm.
Read all posts written by Barbara Tague
