In The Big Short, Michael Burry, played by Christian Bale, made investors $2.69 billion by shorting subprime mortgages. The real figure made by Burry was around $700 million.
Hedge fund managers have found a new cash cow: the gambling industry. This year alone, traders have made $2.3 billion taking short positions against Flutter, DraftKings, and Entain.
FanDuel Failures See Flutter Stock Plummet
Two Sigma Investments has built the largest short position against Flutter, the parent company of FanDuel. The New York-based hedge fund has increased its short position in the company’s shares from 0.61% last year to 2.21% this year.
And the gamble against the betting giant has paid off. Flutter’s stock price is now trading at 7298 GBX, down over 54% year to date.
DE Shaw has also taken a strong position against the company. The multinational investment group started increasing its position last October and was shorting 1.49% of Flutter’s London-listed stock, as reported by the Financial Times.
FanDuel’s failure to grow in the US amid the threat from prediction markets has been a big factor in the drop and has also led to the dismissal of CEO Amy Howe this month. Tax hikes in the UK have also affected Flutter, which owns Paddy Power, SkyBet, and Betfair, some of the country’s biggest betting brands.
Short Interest Falling As Stocks Recover
DraftKings, although performing better than FanDuel, has also seen its stock price fall considerably this year, leading to profits for hedge funds that have been shorting the company. Its price has declined almost 30% since the start of the year.
The short interest has decreased almost 12% over the past month, however. MarketBeat reports there is now a short interest of 36.09 million shares, representing 13.78% of the public float. The company’s share price has risen 6.76% over the past month.
Similarly, Entain, the parent company of Ladbrokes and Coral and a 50% owner of BetMGM, has seen its share price drop by about 30% this year. Marshall Wace, Millennium International Management, and Capital Fund Management have all shorted the gambling group.
But, they are beginning to cash out. All three investment groups have reduced their short positions in the company. Marshall Wace now has a position of 0.99%, down from 1.7% last month. Capital Fund Management has gone from 0.82% down to 0.68%, while Millennium International is down from 1% to 0.58%.
The short positions on Flutter may also have peaked. Two Sigma Investments and DE Shaw both slightly reduced their positions this month.
Prediction Market Scrutiny Could See Prices Recover
This week has also seen gaming stocks recover. Entain holds a consensus rating of Buy to Strong Buy among major Wall Street and London-based analysts.
Barclays analyst Brandt Montour said the losses in value for Entain, DraftKings, and Flutter are due to “extreme levels of pessimism” among investors amid the rise of prediction markets.
Kalshi and Polymarket have seen their valuations explode. Kalshi is now valued at around $22 billion following a recent funding round. Polymarket is around $15 billion. They were valued at around $5 billion and $9 billion, respectively, last year.
However, the increasing legal scrutiny of prediction markets could mean these are peaks for the companies. Montour said he expects a “relief rally” for Flutter’s price as legal cases ramp up for Kalshi and sports prediction markets.
A lot could hinge on whether the courts eventually rule that prediction markets are gambling or investing. It is a fine line. As the price shifts of betting companies this year show, investments are undoubtedly a gamble.
