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Short Sellers Continue to Lick Their Wounds as 15% + Losses Mount for This Year’s Performance

“The U.S. stock market is at all-time highs. Technology stocks have surged, from TwitterTWTR -2.52% to LinkedIn to FacebookFB -1.01%. Even individual investors who doubted the staying power of the rally are now pouring money into stocks.

About the only people gnashing their teeth are short sellers, the investors who make a living betting that stocks will fall in price rather than rise. Short-selling hedge funds are down nearly 15% from the start of this year through October, according to hedge-fund tracker HFR.

Last week was another miserable one for those hedge funds and other grumpy investors who are skeptical of the market’s rise. The Dow Jones Industrial Average rose for the seventh week in a row, finishing at 16064.77. On Friday, the S&P 500 closed above 1800 for the first time.

There are few investors dedicated to wagering against stocks. James Chanos of Kynikos Associates runs a hedge fund that largely places short wagers, but there are only 24 other such firms, HFR says. Overall, these shorts manage about $6.3 billion, down from a peak of $7.8 billion in 2008.

But many more investors place bearish bets as part of their overall investing strategy. There are nearly 3,700 “long-short” hedge funds that invest in stocks, managing a total of $686 billion. Lately, these traders have had to adjust their strategies in significant ways to squeeze out returns during the market’s rally, or to just keep themselves going.

“Clearly, there’s been a tremendous amount of pain on the short side, and people are giving up on shorting individual stocks,” says Alan Fournier, who runs Pennant Capital Management. The hedge fund manages $6.5 billion, buys and shorts stocks, and is up more than 10% so far this year, according to investors.

Pennant has profited from shorts against BlackBerry Ltd., which has faced pressure on sales, and developer St. Joe Co., which has tussled with short sellers over the value of land holdings.

“Funds that are dedicated to short selling are closing, and others are starting long-only funds,” which buy shares but don’t short them, Mr. Fournier says.

Some bearish investors are exiting short positions more quickly than usual when their bets turn negative, trying to keep losses to a minimum. Others are reducing wagers they had placed against the broader market, to avoid further pain if the rally continues. Some of these investors continue to maintain bearish bets on individual companies they suspect will run into trouble. Still others are shifting to shorting emerging-market stocks and pockets of weakness in the U.S.

In any case, these investors have been licking their wounds.

“Being bearish in the bull market has been, thus far, a mug’s game and a hedge against profits,” says Douglas Kass, who runs hedge fund Seabreeze Partners Management in Palm Beach, Fla., and has been wagering against the market….”

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