• Research

Feb 21, 2017

S3 BLACKLIGHT: Shorts Could Have Pocketed $100+ Million on Fannie and Freddie Today

Shares of both government sponsored entities Fannie Mae (FNMA US) and Freddie Mac (FMCC US) lost as much as a third of their values intra-day after a federal appeals court upheld a rule that blocked hedge funds from suing to collect billions in post-bailout profits.  Investors who have bearish positions on the short side of these mortgage guarantors are partying like its 2008 again.

According to our proprietary S3 Short Interest Indicator, which measures the real-time relative change in shorting activity, there were as much as $205.1 million and $104.2 million in short exposure (dollars at risk) on Fannie and Freddie as of Friday’s close, respectively.  If all shorts were to cover their positions at today’s low point in price, they would have reaped $76.6 million and $41.5 million in paper profits on Fannie and Freddie, net of financing costs, respectively.  Fees to borrow both names have been static since the start of 2017, trading hands at 150 to 200 basis points on an annualized basis.   After today’s price plunge, the YTD rate of return for the shorts is now calculated to yield ~25% for both.  

Short interest on both names jumped significantly during the first two weeks of December of last year as US mortgage rates rose to the highest level in over two years at the time.   Short sellers have continued to add to their bearish positions in the ensuing 3 months, with short interest now sitting at the aforementioned multi-year highs on both a share and exposure basis. 

The recent trend indicates the shorts got this one right, and the ones who realized their gains today will be having a “house” party tonight.  

For more information on the above analysis, please contact:
Matthew Unterman, Director, S3 Partners, LLC    
Matthew.Unterman@s3partners.net
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 decision.


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