The big Aussie short: Hedge funds bet a record $11 billion against the big four banks

Hedge funds have amassed a record $11 billion in short positions against Australia’s four major banks—Commonwealth Bank, Westpac, National Australia Bank (NAB), and Australia and New Zealand Banking Group (ANZ)—doubling their bets over the past six months. The short positions, the largest since the Australian Securities and Investments Commission (ASIC) began collecting data in July 2010, reflect concerns about the banks’ overvaluation and exposure to a housing market slump caused by new tax rules. Commonwealth Bank is the primary target, accounting for $5.66 billion of the short positions, followed by Westpac at $2.12 billion and NAB. ANZ has seen minimal shorting, representing only 8% of the total. The true size of the short positions may be even higher, as some hedge funds use over-the-counter derivatives like total return swaps, which bypass ASIC’s reporting requirements. The strategy of shorting major banks is known in the industry as the ‘widow-maker’ trade, as rising share prices force short sellers to post increasing cash margins, risking financial strain. David Allen, a portfolio manager at Plato Investment Management, which oversees $23 billion in funds, noted that while the banks remain structurally strong, their valuations were extreme. He stated that the short positions were inevitable, given the banks’ reliance on a housing market now under pressure from tax changes and slowing GDP growth. Allen explained that Plato has not yet shorted the banks but requires multiple ‘red flags’—such as stretched valuations, negative sentiment, and broader economic warnings—before taking such a position. The banks’ net interest margins, which measure profitability from loans versus savings costs, have also peaked, signaling potential future declines in earnings. The short-selling activity highlights growing skepticism among institutional investors about the sustainability of Australia’s banking sector, particularly as housing market dynamics shift due to regulatory changes. Analysts suggest the bets reflect broader concerns about economic slowdowns and the long-term stability of the banks’ core revenue drivers.