Short Selling in 2013: Why These Billion-Dollar Bets Went Bad - And What's Ahead

If you looked at holdings of hedge fund barons William Ackman and David Einhorn at the start of 2013, it looked like 2013 was a year for short selling.

In December 2012, Ackman placed a $1 billion bet that Herbalife Ltd. (NYSE: HLF), which he calls "a pyramid scheme," would fail. Einhorn bet against Green Mountain Coffee Roasters Inc. (Nasdaq: GMCR) back in October 2011.

But HLF shares have doubled this year. And GMCR is up close to 74%, as its ubiquitous K-Cups deliver single "doses" of coffee to offices and homes worldwide.

Hedge funds that had big short positions this year have seen their gains almost zeroed out, offset only by profitable long positions. Or they are sharply down.

In fact, we're in the worst short market in a decade, according to recent analysis by The Wall Street Journal. Short-selling activity is down 53%.

"It's actually more painful now than it was in '99," veteran short-seller Andrew Left told The Journal.

The Russell 3000's (RUA) list of the 100 most heavily shorted stocks has actually outperformed the broader index. Tesla Motors Inc. (Nasdaq: TSLA), Zillow Inc. (Nasdaq: Z), Netflix Inc. (Nasdaq: NFLX), SUPERVALU INC. (NYSE: SVU), and Yelp Inc. (NYSE: YELP) - all heavily shorted stocks - have absolutely clobbered the Russell 3000, the Dow Jones Industrial Average, and the S&P 500.

SuperValu, the "worst" performer here, is up nearly 204%. Tesla is up more than 380% for the year.

Anyone shorting these stocks on margin is facing devastating losses. Some have probably already arrived in Paraguay on a fake passport...

But not everyone lost big this year in the short market. In fact, Money Morning Capital Wave Strategist Shah Gilani has found some that have returned more than 100% even as the bulls run on... and on... and on.

So, how did these famed investors get it so wrong?