Why did hedge funds lose more than $6 billion this year after betting against cruise lines and hotel

Hedge funds have faced significant losses due to their short positions in cruise lines and hotels, particularly companies like Carnival, Royal Caribbean, Norwegian, Airbnb, and Booking.com. The losses have amounted to $6.4 billion, as these companies have experienced a remarkable surge in value, more than doubling their stock prices so far this year.

The unexpected turn of events can be attributed to several factors. At the beginning of the year, many US investors anticipated an impending recession, leading them to avoid sectors exposed to potential downturns in consumer spending. However, economic growth in the US has remained resilient despite higher interest rates, instilling confidence in a potential "soft landing" scenario where inflation can be brought down without causing a recession.

Cruise lines were initially perceived as highly vulnerable due to their debt burden, which increased significantly during the pandemic when their fleets were grounded. Carnival's debt, for instance, peaked at over $35 billion in the first quarter of this year, up from $10 billion at the end of 2019. However, the industry's rebound surprised short sellers as Norwegian and Royal Caribbean returned to profitability in recent quarters, while Carnival managed to reduce its losses by 78% year on year.

The North American consumer has proven to be remarkably strong, boosting revenues for these companies and enabling them to address their debt piles. Despite Carnival's highly leveraged business, its valuation has normalized, which has puzzled market analysts. Overall, hedge funds underestimated the robustness of the US consumer spending and the ability of cruise lines and hotels to rebound from the pandemic's impact. This miscalculation resulted in substantial losses for short sellers.

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