In January 2014, veteran short-seller Bill Fleckenstein said he was readying a new fund to bet on falling stock prices. More than a year later, he's still waiting to launch that fund.
Despite lackluster U.S. economic data, a world grappling with slow growth, concern that Greece and Ukraine could default on their debts, the U.S. stock market has been more than resilient. Even after a selloff on Friday, major indices are less than two percent from all-time highs and volatility measurements have been close to their lowest levels for 2015.
"How are you supposed to actively short stocks in this environment? It has been impossible," Seattle-based Fleckenstein told Reuters.
His frustration is shared by others dedicated to betting on declines, if not for the broader market then for individual stocks that look overvalued. Outside of the hard-hit energy industry, most sectors have performed well over the last several months, and dedicated short funds have been stung.
Equity markets continue to benefit from ultra-low interest rates and other moves by central banks aimed at stimulating demand in major economies.
"It all comes down to free money and that old saw—'don't fight the Fed,'" said Jeff Matthews, who runs Ram Partners, a Naples, Florida-based hedge fund.
Through the end of March, Credit Suisse's index that measures the performance of short-biased funds is down 4.4 percent, while its market-neutral index—measuring funds that match long and short bets—is off by 1.6 percent. In comparison, CSFB's broad index of all hedge funds is up 2.6 percent.
Since October, long-short equity funds—which take long positions in stocks expected to increase in value and short stocks expected to decrease in value—have been gravitating more to long bets than at any time since August, according to the Credit Suisse data. In particular, they have been pulling back on unprofitable short positions taken earlier in the year.
"It has been unremittingly horrible for someone like me who has been long value, short over-hyped stocks," said Sydney, Australia-based short-seller John Hempton of Bronte Capital. "It would be more fun if I could go back to making money rather than spending my days thinking about risk management."
Investors like Hempton and Fleckenstein are happy to forget 2013 and 2014: the S&P 500 gained 29.6 percent and 11.4 percent in those years, while Credit Suisse's index of hedge funds with a dedicated short bias lost 25 percent and 5.6 percent, respectively.
Shake Shack squeeze
A number of names targeted by shorts are confounding the bears, including burger chain Shake Shack, and casual dining chain Zoe's Kitchen, both of which are nearly maxed out in terms of short-sale borrowing.
Most of Shake Shack's freely floating shares are not yet available for short bets because of lockup provisions that don't expire until July. That means just 3.6 percent of the float is being shorted - but that accounts for most of what is available through current lending programs, according to data from Markit, which tracks share-lending by big institutions.
Shares in Shake Shack, which were sold in an initial public offering at $21 in January, are now trading at $61.67 - they even rose during Friday's market plunge. Wall Street expects the company to earn 5 cents a share for 2015, which gives it a forward price-to-earnings ratio of an extraordinarily high 1,238.
More than 36 percent of Zoe's outstanding shares are being sold short, according to Markit. It has a forward P/E of 566, based on expected earnings of 6 cents a share for 2015.
The heavy shorting may have helped to drive both companies' shares up even higher as other investors and traders pile in on the long side, triggering what is known as a "short squeeze." As shares surge, short investors' losses are amplified, forcing them to buy the stock and close out their positions.
Investors who thought that oil prices and oil company stocks were heading even lower after a big plunge in the second half of last year have also been hurt. The oil price has recovered some of its losses, and some oil company stocks have rebounded aggressively. The S&P energy sector is up 2.8 percent so far in 2015.
Not every short bet has done badly, depending on the time they were put on. Electric car maker Tesla Motors remains a favorite of shorts, with 21 percent of outstanding shares being shorted. The stock is down 27 percent from its all-time high hit in September.
But over two years its 354 percent gain has crushed the performance of the S&P 500, which is up 34 percent in that time - so it's only those that recently took a short position in the automaker that have turned a profit.
The anticipation of higher rates as the Federal Reserve begins to unwind its ultra-loose monetary policy fostered expectations that the market would become more volatile. But the CBOE Volatility Index remains at relatively low levels, though it did leap on Friday as stock prices fell. Options investors have been betting on reduced volatility in coming months.
Peter Laurelli, vice president of the research group at eVestment, said long-short equity funds suffered net withdrawals of $6.76 billion in December and $7.7 billion in January but combined that's just 2.1 percent of the $687 billion invested in such funds in the long-short equity hedge fund group.
"We're seeing investors put money back to work as many feel volatility will be making a comeback with the Fed likely to raise rates later this year and as redemptions from institutional long-only U.S. equity products are directed to alternative equity strategies," he said.
That hasn't happened yet. Fleckenstein says his plans have been repeatedly dashed, thanks to the central banks. He had expected to use capital raised to short stocks once investor confidence in the Fed's monetary policies deteriorated.
"If I had raised all the money, I would not be short right now," he said, adding that he told clients that he'd be sitting in cash for the most part.