Short sellers made $300 billion in 2022's market wipeout

A terrible year for most investors in the stock market was one to celebrate for traders who bet successfully on its decline.

U.S. short sellers were up 31% in 2022, sitting on $300 billion in mark-to-market profits on an average short interest of $973 billion, research from data analytics firm S3 Partners showed Wednesday.

These winnings came as equity markets closed out their worst run since the Global Financial Crisis more than a decade ago.

The S&P 500 tumbled 19.4% in 2022, the Dow fell 9%, and the Nasdaq Composite dropped 33%. For the first time since 2000, the Nasdaq fell during each quarter of the year.

The major indexes also snapped a three-year winning streak in 2022, battered by aggressive monetary tightening by the Federal Reserve to tame stubborn inflation and Russia’s war in Ukraine.

Short-side returns outperformed the long returns of the S&P 500 and broader Russell 3000, according to S3. But shorts slightly underperformed the technology-heavy Nasdaq Composite as it weathered the brunt of last year’s selling pressures, meaning market gains realized by investors betting against the Nasdaq would've been more than wiped out by the index's decline.

“Short sellers still needed to be good stock pickers in order to maximize their returns,” S3’s Ihor Dusaniwsky said in a note. “Even on a more macro level, picking which sectors to short produced wildly divergent returns.”

Communications Services and Consumer Discretionary were the most profitable sectors for short-sellers, earning traders an average return of 50%. The two components of the S&P 500 led declines among the other nine sectors, logging losses of 37.7% and 36.2%, respectively, in 2022.

Meanwhile, the average short-seller in Energy was down 28% for the year as the sector notched a 64.6% gain, the only one of two with positive returns along with utilities.

Big names like Facebook parent Meta (META), Alphabet (GOOG, GOOGL), Netflix (NFLX), and AMC Entertainment (AMC) were among the most profitable shorts in the Communications Services sector. In 2022, for long investors, Meta shed 64%, Alphabet fell 39%, Netflix lost 51%, and AMC dropped 86%, respectively.

Short-sellers, however, made $5.5 billion in mark-to-market profits on Meta's drop, $2.7 billion on Alphabet's plunge, $2.3 billion on Netflix's decline, and $2.1 billion on AMC's plunge.

Within Consumer Discretionary, headliners like Tesla (TSLA), Carvana (CVNA), Amazon (AMZN), and Rivian Automotive (RIVN) were money makers for short sellers.

Tesla closed out its worst year on record in 2022, shedding 65%, or about $700 billion in market value over concerns around supply and demand and CEO Elon Musk’s management of Twitter. Carvana had an epic drop of nearly 100%, and Amazon and Rivian each fell 50% and 81% in 2022.

In 2022, Tesla was the most profitable and largest average U.S. short, earning traders who bet against the company $15.8 billion in mark-to-market profits.

CEO Elon Musk's take-private deal to buy Twitter, on the contrary, clobbered short-sellers with a 37% mark-to-market loss, S3 Partners said.

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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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