The Big Short 2.0: How Hedge Funds Made $2.3 Billion Shorting Gambling Stocks

While millions of American and British bettors poured money into FanDuel, DraftKings and Paddy Power this year, a small cluster of quant hedge funds quietly positioned for the opposite outcome — and it paid off to the tune of $2.3 billion. New data from analytics firm S3 Partners, first reported by the Financial Times, shows short sellers have booked roughly $2.3 billion in paper profits in 2026 betting against the world’s biggest listed gambling companies, as the rise of prediction markets and a wave of tax increases battered the sector.

Where the $2.3 Billion Came From

The profits were not spread evenly. According to S3 Partners, the overwhelming majority of the gains came from a single name: Flutter Entertainment, the Dublin-headquartered, London- and New York-listed parent of FanDuel and the largest publicly traded gambling company on earth. Funds betting against Flutter racked up an estimated $2 billion in paper profits this year alone.

DraftKings, the dominant US-focused sportsbook, accounted for a further $351 million, while shorts against UK-based Entain — the owner of Ladbrokes and Coral and half of BetMGM — added roughly $35 million. Not every wager worked: traders shorting Evoke, the owner of William Hill and 888, were nursing a loss of about $3.5 million after the stock rebounded more than 50% from its December lows.

The Carnage: How Far the Stocks Fell

Short sellers profit when a stock falls, and in 2026 the falls were severe. Flutter lost more than half its market value, sliding roughly 54% to trade around 7,298 pence in London. DraftKings and Entain each shed about 30%. For a sector that spent the previous half-decade as one of the market's great growth stories, the reversal was abrupt — and it is the engine behind every dollar of those short-seller gains.

The collapse did not come out of nowhere. As we detailed in our coverage of the perfect storm that sent DraftKings and Flutter shares tumbling, investors had been growing uneasy for months about whether the online betting boom could survive a more crowded, more heavily taxed market.

Who Cashed In: The Quant Funds Behind the Trade

The names on the other side of the trade read like a roll call of the world's most sophisticated quantitative and multi-strategy hedge funds. Two Sigma Investments built the single largest disclosed short against Flutter, lifting its position to 2.21% of the company's stock from just 0.61% at the end of 2025. DE Shaw held 1.49% of Flutter's London-listed shares, while AQR Capital Management, Marshall Wace and Balyasny Asset Management all increased bearish positions against the FanDuel parent during the year.

Entain drew its own cluster of bears: Marshall Wace disclosed a 0.99% short, Capital Fund Management 0.68% and Millennium International Management 0.58%. The chart below maps the disclosed positions — blue bars mark bets against Flutter, purple bars against Entain.

Crucially, the figures are estimated paper profits, meaning most funds still hold the positions and the gains are not locked in. S3 Partners data also indicate that portions of the bets have already been covered as some stocks stabilised — DraftKings' short interest, for example, was trimmed by about 12% over a single month as the shares clawed back nearly 7%.

The Bear Thesis, Part 1: Prediction Markets Eat the Sportsbook

So why did the smart money turn on gambling stocks? The first half of the bear case is a new breed of competitor. Prediction-market platforms such as Kalshi and Polymarket let users wager on political, financial and sporting outcomes outside the traditional sports-betting framework — and, critically, they operate with lower regulatory overhead and pay no state gambling taxes. That cost advantage has let them peel users away from the roughly $17 billion US sports-betting market, exactly the audience operators spent billions acquiring.

The market is taking the threat seriously. Over the past year, Kalshi's valuation has rocketed from about $5 billion to roughly $22 billion, while Polymarket's has climbed from around $9 billion to $15 billion. That re-rating mirrors the power shift from sportsbooks to prediction markets that has dominated industry headlines — and helps explain why even Flutter has committed $300 million to building its own prediction-market platform.

Analysts say the sentiment has become self-reinforcing. Barclays' Brandt Montour has described investor mood toward US sports-betting operators as having reached extreme levels of pessimism — the kind of one-way negativity that both justifies short positions and, eventually, sets the stage for a snap-back.

"Investor sentiment toward US sports betting has reached extreme levels of pessimism."
— Brandt Montour, analyst, Barclays

The Bear Thesis, Part 2: A Two-Front Tax Squeeze

The second half of the bear case is tax. Operators are being squeezed on both sides of the Atlantic, and the math is unforgiving: every percentage point added to gambling tax comes straight out of operator margins. In the UK, Chancellor Rachel Reeves' November Budget imposed steeper duties on betting and gaming, and the fallout was immediate — Entain booked a £488 million impairment charge in March 2026 tied directly to the changes. In the US, New York already taxes sports-betting gross gaming revenue at roughly 51%, and several states have raised rates in recent budget cycles.

These pressures are not isolated events but part of a broader pattern of rising levies worldwide, which we track in our rundown of the 2026 gambling-tax changes reshaping the industry. For bears, the combination of a new untaxed competitor and a rising tax burden on incumbents is the textbook setup for sustained margin compression.

The Other Side: Why the Trade Could Still Backfire

Short selling is never a sure thing, and this trade carries real risks. Because the $2.3 billion is unrealized, every position remains exposed to a rebound — and the gambling sector has no shortage of potential catalysts. A long-rumoured MGM acquisition of Entain could force shorts to cover in a hurry, while DraftKings and Flutter are both racing to launch their own prediction-market products that could neutralise the very threat driving the bear case.

Not every gambling name fell, either. Rush Street Interactive climbed about 36% on the year and Super Group rose roughly 9%, while Evoke's 50%-plus rebound turned its shorts into losers. The single most important driver from here may be regulation — and it could cut either way.

"Sentiment may shift in the opposite direction depending on regulatory developments."
— Barry Jonas, analyst, Truist Securities

Whichever way the next chapter breaks, the scoreboard so far is clear. As ordinary bettors and long-term shareholders absorbed one of the sector's worst years on record — even as Flutter completed its full buyout of FanDuel at a $31 billion valuation — a handful of hedge funds read the room first and walked away $2.3 billion richer, at least on paper.

Sources

• Short sellers reap more than $2bn profit betting against Paddy Power owner — The Irish Times (carrying Financial Times reporting), 25 May 2026
• Hedge funds profit from slump in gambling stocks — Financial Times (original reporting)
• Short-interest and paper-profit data — S3 Partners