Hedge funds have lost more than $6bn this year betting against cruise lines and hotels after underestimating the resilience of US consumers.
Cruise lines Royal Caribbean and Carnival are two of the 10 most heavily shorted companies in the S&P 500 but have confounded short sellers’ expectations by more than doubling in value so far this year.
Short sellers — typically hedge funds — aim to make money by selling borrowed stock and buying it back at a lower price when the shares decline. The sharp rally in cruise lines and other holiday accommodations, however, has left them sitting on $6.4bn of mark-to-market losses, according to data from S3 Partners.
Carnival, Royal Caribbean and smaller rival Norwegian accounted for $2.9bn of the losses. Large short positions in Airbnb, which has rallied 70 per cent year to date, and Booking.com, which is up 44 per cent, have also inflicted big losses.
Many US investors started the year expecting an impending recession, encouraging them to avoid sectors that would be exposed to a downturn in consumer spending. However, economic growth has remained resilient in the face of higher interest rates, boosting confidence about the chances of a “soft landing” — bringing down inflation without causing a recession.
Quantitative hedge fund Qube Research and Technologies and UK-based Tellworth Investments are among the hedge funds with publicly disclosed short positions on Carnival, according to data gathered by Breakout Point.
Tellworth declined to comment, and Qube did not respond to a request for comment.
Cruise lines were seen as particularly vulnerable to a fragile economy as they had piled on debt while their fleets were grounded during the coronavirus pandemic. Carnival’s debt pile grew from about $10bn at the end of 2019 to a peak of more than $35bn in the first quarter of this year.
But Norwegian and Royal Caribbean both returned to profitability in their most recent quarterly results, while Carnival reduced its losses by 78 per cent year on year. Carnival chief executive Josh Weinstein in June said the company was “experiencing a phenomenal wave season”, while Royal Caribbean last month increased its guidance for the second time in three months and said “the North American consumer remains incredibly strong.”
Rising revenues have also allowed them to begin making a dent in their debt piles, though Greg Johnson, analyst at Shore Capital, said Carnival remained “a very leveraged business”.
Despite the high levels of debt and sharply rising borrowing “Carnival’s valuation has completely normalised . . . It’s a head-scratcher,” Johnson added.