The volume of 'short interest' on the ASX200 is 14 per cent higher than it was one year ago, says State Street Global Advisors – and it adds up to a $30 billion bet against Australian companies.
In a note to investors, State Street Global Advisors' head of active quantitative equity, Olivia Engel, said short selling on the ASX200 is currently at "historically high levels".
Because a majority of short sellers are hedge funds and institutional investors who are "relatively informed", the increase in short positions could be a worrying sign for the local stock market, Ms Engel said.
There are "various theories" concerning the increase in short interest on the ASX200, she said: "It could be down to an increase in hedge funds operating here; it could be increased allocations to long-short strategies that need to be invested; or, more ominously, it could reflect increased bearish sentiment towards our market from global funds."
Much of the $30 billion in short positions has been directed towards financial stocks, Ms Engel said.
"Unsurprisingly, due to their size, this is dominated by the banks and there have been few signs of a major change in sentiment towards this cohort to date," she said.
"Positive share price reactions to poor interim bank results are probably a symptom of above average short interest in the sector."
However, the most heavily shorted sector has been consumer staples, she said.
"This sector was once synonymous with defensive – dare we say dull – through-the-cycle investments. However, structural headwinds for some of the largest of these companies have seen underperforming share prices and increasing risk," Ms Engel said.
The strong rise in the energy sector since hitting its lows in January appears to have spared it from being targeted by short sellers, she said.
"It remains to be seen whether this represents an ongoing change in fortunes for the energy sector or just a short squeeze," Ms Engel said.
"Short interest levels as a driver of volatility may be an interesting short story, but not the entire tome."