The SPAC Craze Heating Up US Stock Market... Will It Become Prey to Short Selling Forces?

SPAC Short Selling Fund Size Surges Over 3 Times Since Early Year
Experts Say "SPAC Bubble Collapse Risk Has Increased"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Suhwan] Amid the ongoing investment craze surrounding Special Purpose Acquisition Companies (SPACs) that are heating up the U.S. stock market, concerns about a bubble have emerged, making them targets for short-selling forces.

According to the Wall Street Journal (WSJ) on the 14th (local time), the amount of short-selling funds targeting SPACs recently reached $2.7 billion, more than tripling compared to the beginning of the year ($724 million). WSJ reported, "Short-selling is concentrated mainly on SPACs whose stock prices have surged," adding, "Short-sellers believe some SPACs are excessively overvalued."

In fact, the short-selling ratio of CCIV, a SPAC whose stock price surged 167% since early this year ahead of its merger with electric vehicle maker Lucid, more than doubled compared to last month. Additionally, Danimer Scientific, a bioplastic company that went public through a SPAC merger earlier this year, saw its stock price fall 35% from its February peak ($64) to $41.84, while its short-selling ratio increased significantly from 1% in January to 8.5%.

The background behind the concentrated short-selling amid evaluations of a SPAC bubble is interpreted as most companies listed through SPACs having unclear substance and no clear sources of profit. For example, Rose Town Motors, an electric truck company that went public via a SPAC merger in October last year, saw its stock price plunge about 17% on the 12th after Hindenburg Research, a short-selling specialist firm, released a report accusing the company of misleading investors about order and production volumes.

The U.S. Securities and Exchange Commission (SEC) issued a statement on the 10th warning, "Investing in SPACs is not a good idea." WSJ noted, "Most companies listed through SPACs have high market capitalizations, making it easier to borrow shares and sell them short again," adding, "Therefore, the risk of short-selling is inevitably higher."

Furthermore, as concerns about inflation have risen due to the sharp increase in U.S. Treasury yields last month, technology stocks have continued to decline, with SPAC stocks being hit even more severely. According to WSJ, the Nasdaq index, composed mainly of tech stocks, fell 7.3% over a month since mid-February, while SPAC stocks dropped 17% during the same period.

As funds shift to value stocks that can minimize market risks and offer stable returns, forecasts suggest that the decline in SPAC stocks will accelerate. Sam Adrangi, founder of Kairis Capital, analyzed, "The surge in SPAC stocks indicates they have essentially reached a peak," adding, "With investors expected to sell off SPACs massively to reduce risk, the possibility of a SPAC bubble collapse has increased."

Meanwhile, a SPAC is a company listed on the stock market that merges with another unlisted company within a set period and is established solely for the purpose of corporate acquisition. For unlisted companies, going public through a SPAC offers the advantage of reducing listing procedures compared to a traditional initial public offering, leading to an increase in cases of mergers with SPACs recently.

This content was produced with the assistance of AI translation services.