JB Hi-Fi surge shocks funds
Almost one in five JB Hi-Fi shares (18.57 per cent) is held by hedge funds, making it the most shorted stock in the S&P/ASX 200.
The retailer's upbeat earnings announcement on Monday took the market by surprise and triggered a buying frenzy further fuelled by funds trying to cover their short positions.
As more discretionary retailers prepare their first-half results, analysts say fund traders could be forced to retreat from other short positions.
"There is a fairly wide-held view by hedge funds that discretionary retail is the one to short," said Bell Potter's head of research, Peter Quinton. "Those hedge funds would have to be very, very nervous at the moment about their short positions [and] I suspect they will begin to wind those positions back."
Six of the top 10 most shorted stocks are discretionary retailers, including JB Hi-Fi, Myer, David Jones and Harvey Norman.
The second most shorted stock is Iluka Resources, with 16.26 per cent of shares with hedge funds. Third is Fairfax Media, with 15.57 per cent.
Discretionary retail has been targeted by hedge funds on the assumption that consumers watching their spending would cut back on items such as flat-screen TVs and electronic equipment.
In the case of Fairfax, Mr Quinton said hedge funds were weary of advertising revenue. "If the domestic economy is weak, advertising is very sensitive to GDP growth. If you're a bit bearish on GDP growth, you're bearish on advertising," he said.
Jacqueline Fernley, head of research at Wilson HTM Investment Group, said recent surprise profit announcements might prompt shorters to exit their position.
"Given we've had two retail results and two significant surprises, there's an argument to suggest that they might mitigate some of their risk prior to the results," she said.
But she admitted there were still legitimate headwinds facing the discretionary retail sector.
"They are absolutely still there. It's just that there are a number of drivers going on in the marketplace."
Mr Quinton said hedge funds had been caught by surprise. "For whatever reason, they didn't believe what they were seeing. And now they're caught," he said.
But Daniel Liptak, head of alternative research at Zenith Investment Partners, said the money lost to short-selling this week would only be a small part of fund portfolios. "As a complete market, Australia is much less short-sold than the rest of the world."
HEDGE FUND TARGETS
% of shares short sold
JB Hi-Fi 18.6
Iluka Resources 16.3
Fairfax Media 15.6
Myer 14.0
Paladin Energy 13.2
SOURCE : ASIC
Frequently Asked Questions about this Article…
JB Hi‑Fi’s share price jumped after an upbeat earnings announcement surprised the market. The result triggered a buying frenzy as investors bought stock and some hedge funds rushed to cover their short positions, amplifying the move.
According to ASIC data cited in the article, about 18.6% (reported as 18.57%) of JB Hi‑Fi shares are held short by hedge funds, making it the most shorted stock in the S&P/ASX 200 at the time of the report.
The article lists other heavily shorted stocks from ASIC data: Iluka Resources around 16.3%, Fairfax Media about 15.6%, Myer 14.0% and Paladin Energy 13.2%. Several discretionary retailers such as David Jones and Harvey Norman were also among the top shorted names.
Hedge funds have targeted discretionary retailers on the assumption that consumers watching their budgets would cut back spending on non‑essentials like flat‑screen TVs and electronics. That bearish view on consumer discretionary demand made these retailers attractive short targets.
Analysts in the article suggested funds forced to cover large short positions in JB Hi‑Fi might begin winding back other short bets, which could reduce short interest across discretionary retailers and potentially lift those share prices as short sellers retreat.
Zenith Investment Partners’ head of alternative research, Daniel Liptak, noted that the money lost to short‑selling in this episode would likely be a small part of overall fund portfolios, and that the Australian market is generally less short‑sold than many other markets.
Wilson HTM’s Jacqueline Fernley said recent surprise profit results can prompt short sellers to exit positions to mitigate risk ahead of other results. Such surprises can quickly change investor sentiment in the sector, though she also warned legitimate headwinds for discretionary retail remain.
The article explains hedge funds are wary of advertising revenue because it is highly sensitive to domestic GDP growth. If the economy weakens, advertising tends to fall, which is why funds have been shorting media companies such as Fairfax Media.
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