ANALYSIS:The amount of stock out on loan to short sellers has tripled since the start of the decade, writes Proinsias O'Mahony

TUMBLING STOCK exchanges across the globe mean that 2008 is turning out to be a nightmare for investors. But for short sellers, though, the going has rarely been so good.

The Euro Stoxx 50 Short Index is up by 29 per cent since January, its best performance since 1992.

Short sellers attempt to profit from a declining market, borrowing shares they don't own and then selling them. They hope to close the bet by buying back these shares at a lower price. Unsurprisingly, with global financial write-downs exceeding $450 billion (€284 billion) and 22 out of 23 countries in the MSCI World Index falling into bear markets, it's an increasingly popular strategy.

Globally, it's been estimated that more than $1.4 trillion of securities are now on loan to short sellers.

In America, the amount of stock out on loan to short sellers is at its highest level since 1931, with levels on the US indices increasing by about 50 per cent over the last 18 months.

Indeed, the amount of stock out on loan to short sellers has tripled since the beginning of the decade as shorting becomes increasingly mainstream.

Better than expected earnings from financial stocks sparked a major bout of short-covering last week, when individuals who have shorted a stock have to buy it in order to meet their commitments - with the US financial sector surging by 12 per cent in a single day - its biggest ever one-day increase.

Research from Bespoke Investment Group shows that the S&P stocks with the highest levels of short interest rose by over 15 per cent in just two days, almost seven times the gain seen by the least shorted stocks. Two stocks that certainly participated were fallen mortgage giants Fannie Mae and Freddie Mac, who enjoyed bounces of 90 per cent and 75 per cent respectively.

Despite this, Bloomberg estimates that short sellers who bet against the stocks profited by at least $1.4 billion in the first two weeks of July.

In Ireland, too, the shorts were running for cover last week as Irish bank stocks rebounded strongly off their lows. Anglo-Irish Bank, the most shorted of the Irish financials with over 15 per cent of its stock out on loan, rose by almost 50 per cent in a week. Despite this, shorts have done well out of Anglo, much to the chagrin of many shareholders.

The relationship between the short and long investor can be a testy one.

Allegations of rumour-mongering by short sellers saw official investigations in both the UK and Ireland in recent months. More recently, the British Financial Services Authority imposed new disclosure rules on short sellers that sell shares in rights offerings, citing the need to reduce the "severe volatility" in companies conducting rights issues.

In the US, rules were introduced last week to curb certain types of shorting in major financial firms, a move that inspired much derision from detractors.