U.S. short sellers were down -$217 billion in year-to-date mark-to-market losses. This was a -14.75% YTD mark-to-market return versus the S&P 500 +16.39%, Russell 3000 +15.67% and Nasdaq +20.36%.

Most short positions were unprofitable, with 70% of every dollar shorted being losers.

Shorts were profitable in only three sectors while unprofitable in nine sectors.

The most profitable industries were Paper & Forest Products; Diversified Consumer Services; and Household Products. While the least profitable industries were Metals & Mining; Communications Equipment; and Electrical Equipment.

There was more short selling in larger cap names than smaller cap names, 77% of every dollar shorted was in mega and large cap names. Larger hedge funds cannot trade in smaller cap names due to their large AUM’s and limitation on the number of securities they can effectively manage in their portfolios.

But even though most of the short exposure was in the larger cap stocks, short sellers were more profitable in smaller cap stocks.

SPAC’s, Consumer Staples, and Real Estate were the only profitable sectors on the short side. Tariffs, higher production costs, and high interest rates weighed down on these sectors, and they underperformed the rest of the market.

While Materials, Communication Services and Information Technology were the most unprofitable sectors. Production onshoring, future foreign investment, AI, and most of the Mag 7 drove stock prices higher in these sectors.

Looking into the industries within these sectors we see that Paper & Forest Products (LPX & WFG), Diversified Consumer Services (DUOL & LRN), and Household Products (PG & CLX) were the most profitable Industries. Metals & Mining (CRML & BGL), Communications Equipment (MSI & FFIV), and Electrical Equipment (SMR & ENVX) were the leastprofitable.

Interestingly, short-side profitability skewed toward the smaller cap names. Mega and Large cap shorts were down -25% and -15% respectively, while Micro and Nano cap shorts were up +38% and +153% respectively. Short sellers had to be in the larger cap names due to the size of their short book and as hedges to long positions and took losses. But they were profitable in their Small, Micro and Nano cap “stock-picker shorts.”

Individually, the most profitable shorts in the market were:

Individually, the least profitable shorts in the market were:

In a rising market it is inevitable that the short side is a drag on a portfolio’s profitability. But it is unavoidable since a leveraged hedge fund portfolio requires both long-side and short-side bets. The more leverage a hedge fund requires, the larger the short book they need to build. The majority of these short positions are in larger cap names which act as a hedge to offset the general market risk of a portfolio, or its Beta, while a smaller portion of their short portfolio are their Alpha bets, those positions which hopefully add profitability to the bottom line.

Short trading in the largest shorts such a NVDA, APPL, TSLA and MSFT is more of a portfolio hedge than a profit maker while trading in stocks such as APLD, HIMS, CAR & GME are the stock-picker shorts which create Alpha and differentiate the expertise of portfolio managers in building a comprehensively profitable portfolio. With hedge fund leverage rising (short exposure increased from $1.3 trillion to $1.7 trillion in 2025) we are seeing more names being shorted in smaller caps which are potentially out-sized Alpha generators. Using different factors in short-side stock selection can differentiate a portfolio from the herd and make a fund more attractive (less risk – more return). Using S3’s short-side analytics adds new factors and data points to create a less risky higher return portfolio.

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The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (“S3 Partners”) to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks, and merits, as well as the legal, tax, accounting, and investment consequences, of such decisions.