May 11, 2021 - Economy

Hedge funds find new favorite short

illustration of a dice with money signs on it instead of dots

Illustration: Sarah Grillo/Axios

In the post-GameStop world, shorting equities is still too risky for many hedge fund managers.

Why it matters: With the equity market too buoyant to bet against, investors have turned to the high-yield bond market for shorts, with a view that prices there are also inflated.

Details: About $55 billion of global high-yield bonds have been sold short, up from $35 billion at the beginning of the year, Bloomberg reports. That's the biggest short position in high-yield since 2008.

  • “The scary part of that trade is that it’s expensive to short cash bonds,” a hedge fund manager tells Axios.
  • To short a bond, the investor has to pay to borrow it — as well as pay the semi-annual coupon payments as they come due.
  • The upside is also limited since bonds are unlikely to plummet dramatically over a short time, unless they are tied to distressed companies (and often not even then).

Be smart: Shorting high-yield is more frequently a view on the market overall.

  • High-yield bonds are at toppy valuations. The ICE BofA high-yield index now yields 4.2%, and it's sat at record lows in the low-4% area since February.
  • Investors shorting high-yield are positioning themselves for a potential scaling back of central bank support, Bloomberg says.

Meanwhile, in the equity market, the median short interest in S&P 500 companies is near a 17-year low.

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