What are the hedge funds shorting?

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Speaker 1 Our active approach finds opportunities and volatility, helping our clients to navigate risk and achieve their long-term goals. PGEM, our investments shape tomorrow today.

Speaker 1 Cushkin

Speaker 2 The mood in markets right now remains decidedly wobbly. Stocks have generally had a pretty good year after some early shocks, but now, up at these heights, they're finding the air a little thin.

Speaker 2 The big worry, of course, is an AI bubble. Are we in one? And if we are, when does it pop and what happens next?

Speaker 2 Regular listeners will know we've talked about this a lot lately and spoiler alert, we're very likely to keep on talking about it too.

Speaker 2 But today on the show, we're trying to find out what the supposedly smartest people in the room are thinking. Heaven knows, that's not us.

Speaker 2 But we want to know what are the hedge funds betting against and what does that mean for the rest of us mere mortals?

Speaker 2 This is Unhedged, the Markets and Finance podcast from the Financial Times. I'm Pushkin.

Speaker 2 I'm Katie Martin, a markets economist at the FT in London, where everyone is pretty nervous about this week's budget from the government. Hooray for us.

Speaker 2 But I have an unusual co-pilot today, Robin Wigglesworth, the editor of FT Alphaville, who, despite his very English-sounding name and pretty English-sounding accent, is actually half Norwegian.

Speaker 2 More than half, given that he lives all the way over there in Oslo. First of all, for our listeners who may not be aware, like, what is Alphaville? What is this thing that you edit?

Speaker 2 It's basically Nerdsville, right?

Speaker 3 Yes, that's a pretty apt description. But it's basically our finance blog.
So,

Speaker 3 you know, we dig into anything that's kind of weird or fun or interesting in finance, economics, business, markets, investing. We can do kind of whatever we want, whatever we want in any way we want.

Speaker 3 So we try to have fun with it because, I mean, you and I know that this stuff is actually genuinely really fun. And we try to maybe let that get reflected in how we write as well.

Speaker 2 Yeah, exactly. And there's an awful lot of nerds out there.
And like a proper nerd, you are very excited that you've launched on Substack this week. What's that all about?

Speaker 3 Yeah, that is actually quite exciting. I mean, AlphaVol has had newsletters in the past, but they've been kind of, dare I say, of simple, half-assed efforts.

Speaker 3 But this is something a bit more ambitious, a bit more fun. We don't really want to be beholden to Elon Musk and X or any other social networks.
We don't want to depend on search.

Speaker 3 And frankly, it's just getting into people's inbox is a good way of sort of writing and talking directly to people. So, Substack kind of worked well for us.

Speaker 3 And, you know, they have little video capabilities. We can start little forums there.
We let people know about drink stews, pub quizzes, stuff like that. So, it's kind of perfect and exciting.

Speaker 3 And most exciting of all, I don't have to write it myself. It's my colleague Bryce doing that.
Exactly.

Speaker 2 Just hoof it off to Bryce.

Speaker 3 Yeah, he gets us in so much legal trouble anyway. So, I just figured, just make him do it.

Speaker 2 Yeah, exactly. But, listeners, if you are deep down a nerd and you wish to express that in your life, then there is a sub stack for you.
FT Alphaville, very easy to find.

Speaker 2 Robin, so people who listen to this show are well accustomed to the thing that we do at the end called long shorts. So that's where you go long things you love and short things you hate.

Speaker 2 And we call it that because in the real world of markets, that's what hedge funds and other sort of speculative investors do, right? If they like a stock, they buy it.

Speaker 2 If they really like a stock, maybe they borrow money to buy loads of it. And maybe they they even buy options that pay out loads of money if the stocks keep climbing.

Speaker 2 But if they don't like a stock, they go short. They bet against it.
What does that involve?

Speaker 3 Basically, like two main things. One thing is short selling in that you borrow the stock rather than buy it and then sell it.
You're actually selling something you borrowed.

Speaker 3 And if that stock then falls in value, well, you can buy it back and return it to the original owner and pocket the difference, essentially a profit. So if you borrowed something at $100

Speaker 3 and it drops to $10,

Speaker 3 you sell it at $100, it drops to $10, you buy back at $10 and hand it back to the original owner at the $10 value and you've made $90.

Speaker 3 Another way is doing it through options. So you talk about like calls, it's the type of option that, you know, you gain upside exposure.
You can also buy puts.

Speaker 3 So that's the right to sell a stock at a certain price if it drops enough.

Speaker 2 So you can just bet that the value of this thing is going to fall. And if you make money out of it, happy days.
Happy days. But it's a risky old game, isn't it?

Speaker 2 It's not for the faint-hearted shorting stocks because if you short something and it goes up, you get annihilated. Not for the faint-hearted, but what is going on?

Speaker 2 What are hedge funds, you know, kind of like speculative investors? What sort of shorts are they taking out on the U.S. stock market at the moment?

Speaker 3 Well, the positioning data for hedge funds on short selling is a little bit iffy sometimes, but we do get these little snapshots here and there. Goldman Sachs has a big prime brokerage.

Speaker 3 That's kind of the desk that is like a concierge service for hedge funds, and they collate a lot of this data.

Speaker 3 And it was really interesting seeing the latest snapshot, which indicated that, look, hedge funds are still not kind of really putting on the big short on AI quite yet.

Speaker 3 As you point out, you can get absolutely destroyed if it goes up against you. Because, you know, if you buy a stock, worst thing, it can go to zero.
You can lose all your money, but that's it.

Speaker 3 If you're a shorter stock and it goes up, there's no limit to your losses. You can lose an unlimited amount of money in theory.
So it is a dangerous thing.

Speaker 3 But now they seem to be dabbling around the edges of the AI. Yeah, they're nibbling on it.
So,

Speaker 3 yeah, just kind of testing things out. Maybe a few of the weaker companies in the AI hyperscale game.
Yeah. Or a few companies that are benefiting from it, sort of adjacent AI-adjacent stocks.

Speaker 2 Yeah, so I was looking at the post that you wrote on this the other day over at Alphaville.

Speaker 2 So about 2.4% of the overall value of the SP 500 index, that's the kind of big index of US stocks, that's currently short effectively. And that's a lot relative to the past five years.

Speaker 2 And it's well above the average that we've seen since 1995. But as you say, they're not shorting your kind of Nvidias and Apples and Amazons of the world.

Speaker 2 Although if you shorted Meta recently, you would have made quite a lot of money out of it. So as you say, they're kind of looking more around the edges and being a little bit cleverer than that.

Speaker 2 So what sort of companies are they betting against?

Speaker 3 Well, in the AI boom, right at the center, but sort of maybe not like a Microsoft or Meta or Alphabet, those kind of stocks, Oracle is kind of seen as the weak one of that herd. I see.

Speaker 3 So it's a big, valuable company and people aren't sort of going crazy shorting it, but we can definitely see short interest as a measure of like how many shares are out on loan has been creeping up for Oracle.

Speaker 3 We've also seen people buying something called credit default swaps on Oracle debt, which is

Speaker 3 an interesting way of betting against a company's bonds, its credit worthiness.

Speaker 2 So just to do a little kind of freeze frame on credit default swaps, these are accursed words. You never want to hear about CDS in relation to anything, ideally, because

Speaker 2 Listeners, I won't bore you with the details, but they are ways that investors can bet against the debt of certain companies.

Speaker 2 And they were absolutely at the center of the drama like a decade and a half ago or so with relation to the Eurozone debt crisis.

Speaker 2 So investors were buying CDS, so buying insurance contracts that would pay out in the event that a member of the Euro defaulted on its debt, which is terrible, terrible, no good, awful thing to happen.

Speaker 2 And you kind of got in these situations where the CDS contracts were kind of the tail that wagged the dog and they were effectively helping the bonds to fall in value.

Speaker 2 And then people bought more of the CDS and it was an unholy mess. And I haven't heard the letters CDS in relation to pretty much anything for quite a long time.

Speaker 2 So the fact that they're back in relation to debt from technology companies is just not a fantastic sign. But the levels aren't that high on the CDS, right?

Speaker 2 Nobody thinks really that Oracle is going to default.

Speaker 3 No, it's more of a bet on Oracle's credit worthiness dropping, not dropping like a rock.

Speaker 3 Nobody's betting that Oracle is going to go bankrupt or like that, but it's just a snazzy way for credit hedge funds, those are hedge funds that deal more with bonds and fixed income rather than stocks, to bet on or against the AI bubble.

Speaker 3 And Oracle, just as the kind of the weaker one of the herd is the one that people are maybe sort of circling around a little bit and keeping an eye on.

Speaker 2 Yeah, just to stick on the issue of debt for a little bit, I was reading a piece from the Swiss bank, UBS, the other day.

Speaker 2 They had a note out, I'm pretty sure it was from Matt Misch on credit and he was saying that issuance so that the amount of debt that's coming from companies in the tech sector has absolutely rocketed so in investment grade debt in the stats that in the states that's kind of safe corporate debt the amount of it that's coming from technology companies it's up by 80 percent this year

Speaker 2 and similarly that there's been a big jump in the amount of private credit that's coming from technology companies and so it's not just in stocks where you can see all this kind of fizzy AI excitement, just the amount of new debt that's coming to market from tech companies is absolutely mind-blowing.

Speaker 2 Does that worry you at all?

Speaker 3 I think it's a symptom of this underlying sort of frothiness.

Speaker 3 These are companies largely that are still wildly profitable.

Speaker 3 have very little debt already. That's why it's kind of notable that Meta and Amazon and Microsoft don't really issue that many bonds, if any.

Speaker 3 So despite them, I think issuing last time time I checked over $300 billion worth this year to finance data centers primarily.

Speaker 3 For those companies, that's still only, you know, it's easy covered by their cash flow.

Speaker 2 Yeah.

Speaker 3 But it is interesting, just so that it kind of displaces everything else, right?

Speaker 3 It's like this big fat elephant walked into the bond market, squatted, and kind of starts commanding attention from everything else.

Speaker 3 So you could easily see knock-on impact on other sectors that suddenly have to compete with meta-bonds in a way they've never had to before.

Speaker 2 Yeah, scary stuff. Yeah, also from the UBS note, they were saying

Speaker 2 AI data center and project finance deals are estimated to have increased tenfold this year to at least $125 billion.

Speaker 2 It's an awful lot of techie debt kicking around. But just so going back to the stock markets, you know, as you say,

Speaker 2 it looks like hedge funds are taking quite a quizzical look at Oracle, but they're also betting against some quite obscure smaller companies in weird sectors like utilities.

Speaker 2 Explain to normal people why utilities get caught up in the mix here.

Speaker 3 Well, that's what I thought was the most interesting in this recent Goldman Sachs report. It showed that there's never been more short interest against U.S.
utilities since at least 1995. Really?

Speaker 3 I think is how far the data goes back.

Speaker 3 And, you know, utilities are kind of, by design, they're kind of boring. They should be boring.
You don't want a utility to be exciting and racy.

Speaker 3 So there's very little short interest in utilities normally. The reason that has changed is that, of course, as much as AI requires data centers to run, data centers require power, a lot of power.

Speaker 3 So a lot of utilities have been investing tens, sometimes hundreds of billions of dollars in new energy projects to fuel these data centers.

Speaker 3 They've seen their stocks rise in tandem with the AI excitement.

Speaker 3 But the danger is, of course, that some of these utilities borrow money and bet the farm on AI and then are left holding the bag when it actually turns out that this isn't that data intensive, that they've built all this infrastructure that they can't really pay for in the future.

Speaker 3 So that's why we've seen a lot of a big spike in short interest in utilities.

Speaker 2 And it just feels like, you know, markets are sort of

Speaker 2 swirling around the plughole a bit, sort of kind of waiting to get sucked down into the abyss, right?

Speaker 2 There is just this sense that they've had it too good for too long and it feels like you know we don't necessarily get a crash in in AI stocks which you know to be clear would like nuke the entire market for a pretty short period of time at least.

Speaker 2 But everyone's kind of dancing around this this sort of bubble theme and wondering when does this get dragged down and what will make it get dragged down.

Speaker 2 I mean your guess is as good as mine, which is as good as anybody else's. What what do you think is going on here?

Speaker 2 What do you think people are waiting for before this correction, if there is one, really takes hold?

Speaker 3 I mean, I have no clue, but really, when the correction actually starts. The reality is that hedge funds, at least the smart ones, don't want to bet against a bubble whilst it's still inflating.

Speaker 3 You don't get run over. You wait until it actually is already collapsing and then you pounce on it, essentially.

Speaker 3 I mean, most hedge funds are still YOLOing into technology stocks and AI stocks in general. They are still massively long NVIDIA and all the other AI companies, and that hasn't really changed.

Speaker 3 What is changing is that you can see they're starting to map out a playbook of what they might start doing when eventually things do crumble, because we know they always do.

Speaker 3 And it might be next week, it might be next month, it might be next year, or maybe in five years. We don't know.

Speaker 3 But you can see that where they think the most carnage is going to fold are all the sort of AI adjacent adjacent sectors like energy companies, utilities that are kind of frankly probably borrowing, investing too much money to service something that might end up proving a bit of a mirage.

Speaker 3 Yeah.

Speaker 3 So we're not there yet, but we're maybe seeing that the early contours of the first playbook, as it were.

Speaker 2 Yeah, the contours of a playbook. I mean,

Speaker 2 you know, this is very much the kind of bread and butter of what you guys do over at Alphaville, isn't it? It's like that little tagline, you know, this is nuts, when's the crash, is

Speaker 2 It's the question that keeps coming up in Alpha Phil Posts, but it does feel like you've been asking it for a long time. Like, when is the crash?

Speaker 2 Like, what are you going to write about when that actually happens?

Speaker 3 Yeah, there's a reason why we're financial journalists and not bazillionaires sitting on a Caribbean island by ourselves, counting our massive stacks of money.

Speaker 3 Quite often people will point out that we are irredeemably cynical and skeptical of everything. And we were saying, where's the crash since I think the first time 2013?

Speaker 3 the advantage of being a journalist that we have no skin in the game we'll be proven right at some point and then we'll try not to be too smug about it because frankly everybody else is still richer than us yeah yeah uh but it does feel right now that things have gone a little bit nutty around ai and even if you believe that it is transformational even if it does prove transformational crisis can still be stupid.

Speaker 2 Yes.

Speaker 3 And people forget that dot-com, everything was right. Everything that people said in 1999 was completely right.
But people still lost an ungodly amount of money in the years that came afterwards.

Speaker 2 Yeah.

Speaker 2 So in that sense, it is a little bit of a warning sign that people are starting to put their money where their mouth is and bet against some of the kind of, you know, shakier bits around the edges of the AI trade.

Speaker 2 I mean, do you have a good sense of whether it makes sense to watch what hedge funds are doing?

Speaker 2 Are they the smartest people in the room and do they tend to move first in terms of picking market direction or are they just as lost as the rest of us?

Speaker 3 It's a good question. I'd say that individually, they are incredibly smart.

Speaker 3 They can be wrong, but they are very smart. They have dedicated every little atom of their being to understanding and beating markets.

Speaker 3 And they struggle to do it quite often. As a group,

Speaker 3 no, they do not tend to have a lot of sort of presence when it comes to these things. They move as a herd just like mutual fund managers do and just like day traders do as well.

Speaker 3 So, you know, they get stuff wrong. There are times when hedge funds are unduly negative or unduly positive and the proverbial dumb money,

Speaker 3 the you and me money is farter. Yeah.
But over time, you know, they

Speaker 3 can suss out problems pretty early. And this is why I think we shouldn't look to them to understand the timing of when the AI bubble might burst, but more to understand how it might start playing out.

Speaker 3 And right now, they're saying the main damage is not necessarily going to be in Meta and Alphabet and Microsoft and Nvidia, which have solid, very profitable businesses, even if AI went away tomorrow.

Speaker 3 It's in all the adjacent companies and maybe some of the AI has-beans, but the sort of the second

Speaker 3 players, hangers-on that are trying to basically borrow and and spend as much money to become meaningful players of what they think is going to be a massive transformational industrial shift.

Speaker 3 Those are the ones I think are going to get hammered in the downturn that comes at some point.

Speaker 2 So, look, as we've been saying, short-selling is hard. It's very hard to get it right.

Speaker 2 One of the more famous people in the world who has sort of done this for a living is a chap called Michael Burry. Tell us about him and what he's up to.

Speaker 3 Well, Michael Burry first rose to prominence as one of the few people that sort of bet against the housing bubble in 2008.

Speaker 3 He was immortalized in the book The Big Short by Michael Lewis that was later made into a film, one of the racist films made about financial crisis that I can remember seeing. And

Speaker 3 because of that, he's kind of, because he's such a sort of idiosyncratic character, he's very single-minded, he's become a kind of a celebrity.

Speaker 2 Yeah, he's got court status, right?

Speaker 3 Exactly. And he's just, he's mysterious and inscrutable online.
He's got like a massive following on X.

Speaker 3 And I'd say, I mean, reality, he is a good example of how hard short selling is because although he made an absolute fortune in 2008, a lot of the stuff he's tried to do since then hasn't worked out in the same way.

Speaker 3 It's just very hard being short, a market that, generally speaking, does go up.

Speaker 3 And he tried to put on the short, or he put on the short, it seems, on Palantir and Nvidia earlier this year until in the end he just threw threw in the towel and he closed his hedge fund.

Speaker 3 He couldn't be bothered anymore. So he's set up a sub-stack.

Speaker 3 He just seems to be letting in anybody these days.

Speaker 2 Yeah, so Wiggo, thank you so much for sharing your brain there. As you say, us journalists, we may be poor, but we do have more fun than those terrible finance people.

Speaker 2 I am also, I have personal experience of being short. Firstly, from the point of view that I bet against micro strategy, you might remember, in last year's stock picking competition, and I got killed.

Speaker 2 And also, I'm short in the sense that I'm only five foot two, so take pity on me. But Wiggo, thank you so much, listeners.

Speaker 2 If you are into that sort of stuff, shorting and the guts of financial markets and all of that, check out FT Alphanville in general and its new sub stack in particular.

Speaker 2 Robin, you be a gent, thank you so much. We're going to be back in just one sec with Long Short.

Speaker 1 At PGM, we actively manage risk today while targeting outperformance tomorrow.

Speaker 1 So no matter what investment risks concern you most, from geopolitics to inflation to liquidity, PGM brings disciplined risk management expertise that spans 30 market cycles.

Speaker 1 Our active approach finds opportunities and volatility, helping our clients to navigate risk and achieve their long-term goals. PGM, our investments shape tomorrow today.

Speaker 2 Okie doke, it's time for long short, that part of the show where, as for the rest of the show, in fact, we go long a thing we love or short a thing we hate. Uh, Wiggo, what you saying?

Speaker 3 Well, I don't hate it, but just given the theme of this pod today, I thought I'd go short.

Speaker 3 And I go short the most heavily shorted stock in America, in fact, a company called Bloom Energy that makes fuel cells for data centers and it doesn't actually make a lot of money i think it's forecast to make maybe a hundred million dollars next year and it's valued at around 30 billion dollars

Speaker 3 it has been very heavily sucked up and amped in this whole sort of ai frenzy to kind of preposterous levels and although i'm slightly worried it's a very crowded short and they can be quite dangerous as we saw with GameStop a few years ago.

Speaker 3 I just think like this is nuts. There will be a crash at some point.
So bloom energy is my short.

Speaker 2 Okay, listeners, this is not investment advice, and we are terrible at this. I am short the crypto maxis

Speaker 2 because I had a little bit of a dig at crypto in my column the other day and they didn't even really email to say how much they hate me like they normally do.

Speaker 2 And I thought, these guys are a bit off their game. So I'm not saying please do email me your usual flood of abuse, but I am saying, you know, you're okay, hun.

Speaker 2 Like they have gone a little bit quiet now that Bitcoin has taken a bit of a step back in price Robin again thank you so much for being with us today all of your internet issues notwithstanding listeners this show is produced and edited by our friends at pushkin in the us and they are of course out for thanksgiving thursday so we are going to be back next week if you're in the states have a lovely holiday and wherever you are listen up when we are back in your ears on tuesday

Speaker 2 unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein.
Topa Vorhez is the FT's acting co-head of audio.

Speaker 2 Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free.
A 30-day free trial is available to everyone else.

Speaker 2 Just go to ft.com/slash unhedged offer. I'm Katie Martin.
Thanks for listening.