April was the cruellest month, at least for short-selling hedge funds. Dedicated short-bias funds performed worse than any other strategy in the Credit Suisse/Tremont data set. They’re still in positive territory for the year, but the reversal bodes ill for a strategy that had spun gold out of the credit crunch’s dross.
Skilled short-sellers will come up with ideas, even in bull markets. But more broadly, the short strategy is running into headwinds. First, there are fewer easy targets.
The stumbling bond insurers, house builders, mortgage originators, banks and rating agencies have had most of the juice already squeezed out of them. The stunningly profitable 90% stock plunges in the likes of Countrywide Financial and Ambac, for example, have left shorts with limited potential of further gains. And crowding in the obvious targets has made further shorting expensive.
Then there’s the unsettling uptick in mergers and acquisition activity. Sure, the leveraged buyout deals that kept short sellers hiding in their lairs before the credit crunch are no longer a significant threat. But a flurry of strategic deals has left a lot of shorts licking their wounds.
Take CBS Corp.’s offer for CNET Networks Inc., which had short interest in 20% of its outstanding stock. When CBS plunked down a 45% premium for the Internet company this week, it cost shorts dearly. Earlier, the throngs betting against Take-Two Interactive Software Inc. got squished when Electronic Arts Inc. (EA) made its $2 billion (Rs8,520 crore) offer for the videogame maker, despite EA’s not making a secret of itsinterest.