Guilty until proven innocent: how we treat the ASX's most shorted

Why We’re Talking About Short Interest Now

Corporate Travel Management (ASX:CTD) has been all over the financial news. Even some incredibly successful fund managers have been caught up in the debacle.

For those of us who don’t hold the stock it is largely just an interesting read as updates and stories get drip fed into the AFR. But are there any lessons we can take from it?

Well, one simple but powerful lesson explains why we pay attention when a stock quietly climbs the “most shorted” list.

Through 2024–25, CTD steadily became one of the most shorted names on the ASX. Not long after, it was hit with revelations of more than $160m in alleged overcharging in its UK operations, a trading halt, regulatory scrutiny and the prospect of class actions.

In hindsight, this a situation where the shorts nailed it.

Rather than cherry-pick CTD and declare “never touch a highly shorted stock”, we wanted to answer a simpler, more systematic question:

On the ASX, what actually happens to the median stock that makes the Top-10 most shorted list?

At HD Capital Partners we’re naturally curious (and a bit suspicious of narratives), so we decided to treat this as a data problem first, and a story second.

How We Tested It

We went back through ASIC’s aggregated short position reports, which require short sellers to report daily positions and publish them to the public with a short delay.

From July 2022 onward, we:

1. Pulled the ASIC data at (roughly) the start of each month;

2. Ranked the market by short interest (% of total shares on issue reported as short);

3. Built a simple equal-weight portfolio of the Top-10 most shorted stocks at that point in time;

4. Tracked the share-price performance for the next 12 months for each monthly portfolio;

5. Repeated the exercise at the stock level – looking at the forward 12-month return from the first time a company appeared in our Top-10 list.

Over our sample we ended up with:

· 30 monthly “Top-10” portfolios;

· 62 distinct stocks that appeared in the Top-10 at least once.

This is not a fancy quant model. No factor-neutralisation, no risk-model overlays. Just the basic question an investor actually faces:

“If I buy this stock while it’s one of the most shorted names on the ASX, what happens to me over the next year?”

The Headline Results: A Big, Reliable Red Flag

Portfolio-level results – Top-10 basket:

Across the 30 monthly portfolios:

· Average 12-month forward return: about –8%

· Median 12-month forward return: about –18%

· Strike rate: Only 5 of 30 portfolios produced a positive 12-month return i.e roughly 83% of the time, the “Top-10 most shorted” basket lost investors money over the following year.

When we compare each Top-10 portfolio to the ASX 200 over the same 12-month window, the picture gets worse:

· The relative (excess) returns are even more negative;

· The strike rate as a negative indicator improves further.

In other words, this isn’t just “we did this near a weak market”. The Top-10 list has been a consistent source of negative alpha in our sample.

Stock-Level Results – First Time a Stock Hits the Top-10

To get away from overlapping holdings, we then:

· Took all 300 stock-month entries;

· De-duplicated them;

· And ended up with 62 unique companies that have appeared in our Top-10 list since mid-2022.

For each of these, we measured the 12-month return from the first month it entered the Top-10:

· Average return: –7.7%

· Median return: –8.6%

· Strike rate: About 63% of these stocks were down 12 months later

That’s still a meaningful edge.

If all you did was “red-flag” every new entrant to the Top-10 short list and forced yourself to re-underwrite the thesis, you’d have been on the right side of history more often than not.

Does This Line Up With Global Evidence?

Yes. Our ASX data is very much in line with what the academic literature has been saying for two decades:

· Asquith, Pathak & Ritter (2005): Using US data, they show that stocks with high short interest ratios significantly underperform in subsequent months, especially when institutional ownership is high (a sign that sophisticated investors are active on both the long and short side).

· Boehmer, Jones & Zhang (2008): “Which Shorts Are Informed?”): Find that institutional, non-program shorts are particularly informative – the most heavily shorted stocks by institutions underperform by ~1.4% in the next month (~20% annualised).

· Diether, Lee & Werner (2009): “Short-Sale Strategies and Return Predictability”): Show that trading strategies based on short-sale activity predict future returns, with heavily shorted names delivering significantly lower subsequent performance.

· Akbas et al. (2013/2017): Demonstrate that short interest doesn’t just predict prices – it predicts fundamentals: future bad news, negative earnings surprises and downward analyst revisions.

· Gorbenko (2023, Monash University): Using data from 32 countries, including Australia, finds that short interest significantly and negatively predicts aggregate stock returns in 24 of them, and that this effect is not explained away by classic macro or valuation variables.

Taken together, the picture is pretty clear:

High short interest is, on average, bad news for future returns and future fundamentals.

Today’s Top-10 Most Shorted ASX Names (and how we’d treat them)

Based on the latest ASIC-derived data we used in our work, the current Top-10 most shorted names look roughly as follows:

(Numbers rounded; sourced from ASIC)

We are not making calls here on which of these are “good” or “bad” businesses. Some are high-quality franchises with genuine global growth runways.

What we are saying is that, based on both our own ASX study and a large body of global evidence, appearing on this list should be treated as a major due-diligence event.

If it’s on your watchlist: you should assume the burden of proof has flipped – it’s now “guilty until proven innocent”.

If you already own it: you don’t necessarily have to sell, but you should re-underwrite the thesis from first principles and decide whether you’re comfortable being on the other side of very informed capital.

How We Use This at HD Capital Partners

At HD, we like asymmetric situations: heads we win, tails we don’t lose much. A stock turning up in the Top-10 most shorted is often the opposite – heads we muddle through, tails we blow up.

Practically, that means:

· Hard filter for new ideas

A name in the Top-10 short list doesn’t automatically go into the bin, but it does go into the “needs an exceptional case” bucket. The default is pass unless there’s a very strong, well-evidenced reason to lean in.

· Early-warning system for existing holdings

We treat a material move up the short-interest rankings as a risk alert, even before the share price cracks. It prompts a review of:

o Accounting quality

o Customer concentration and churn

o Regulatory risk

o Changes in management behaviour / disclosure tone

· Position sizing and time horizon

If we do own a stock that is heavily shorted, we:

o Size it more conservatively

o Demand a clear, multi-year path to proving the shorts wrong

o Stress-test the thesis under scenarios the shorts are likely betting on.

In our experience, you don’t get paid extra just for “fighting the shorts”. You get paid for having a variant view that is right and durable, and for sizing it in a way that keeps you in the game.

The Takeaway For Investors

Taking on the short sellers has become a popular call to arms amongst retail investors ever since COVID and the story of Game Stop, immortalised in countless movies and documentaries (search Netflix if you’re unfamiliar).

But you’re probably not Roaring Kitty and that heavily shorted stock you’re looking at probably isn’t GameStop during COVID.

In most instances, it pays to respect the shorts.

If there’s one practical rule we’d leave readers with, it’s this:

When a stock enters the Top-10 most shorted list, treat it as a flashing red light, not background noise.

Our ASX study since 2022, the CTD experience, and decades of global research all point in the same direction:

· High short interest is not destiny – but it is a statistically powerful warning signal.

· The median investor who ignored that signal has historically done poorly.

· You don’t have to avoid every heavily shorted name forever – but you should never own one casually.

For us at HD Capital Partners, that’s the real “alpha from shorts”: not trying to squeeze them, but listening to them – and letting their scepticism keep us out of avoidable disasters.