Hedge fund short sellers have made at least $2.3 billion (€2 billion) this year betting against online gambling companies, which are under pressure from both the rapid rise of prediction markets in the US and steep tax increases in the UK.Traders positioned to make money from falls in the share price of Paddy Power owner Flutter, DraftKings and Entain have accumulated estimated paper profits of $2 billion, $351 million and $35 million, respectively, since the beginning of 2026, according to data provider S3 Partners. Some of this profit has been realised as funds have closed their short positions.Shares in the world’s largest publicly traded gambling company Flutter, which is Dublin-headquartered but dual-listed in London and New York, have dropped more than 50 per cent so far in 2026. DraftKings, which is the closest competitor to Flutter’s US sportsbook FanDuel, is also down about 30 per cent, as investors fret that prediction markets are eating into the $17 billion US sports betting market.Across the Atlantic, London-listed Entain, which owns British betting chains Ladbrokes and Coral and runs US sportsbook and casino brand BetMGM in a joint venture with MGM Resorts, has fallen 30 per cent.The declines come as investor sentiment towards US-focused sports betting companies has “reached extreme levels of pessimism” amid the rise of prediction markets, according to Barclays analyst Brandt Montour. Analysts at Citi last month downgraded Flutter’s shares from buy to sell, citing concerns about the company’s ability to hit its US profit targets.Prediction markets, which allow customers to bet on binary outcomes of future events, are currently regulated as derivatives by the Commodity Futures Trading Commission, enabling them to bypass states’ sports-gambling bans and taxes. They have surged in popularity and now attract billions of dollars in sports wagers every month, sparking fears that they will erode gambling companies’ profits.UK-focused betting brands have also struggled after chancellor Rachel Reeves raised taxes on online casino games and online betting in her November Budget. Entain in March reported that it had taken an unexpectedly large £488 million impairment charge as a result of the new levies, while Flutter – which owns chains such as Paddy Power, Sky Bet and Betfair – in February warned that the new levies were slowing growth.Hedge funds that have increased bets against Flutter include DE Shaw, which started increasing its position last October and was shorting 1.49 per cent of Flutter’s London-listed stock, according to the latest disclosures filed with the UK Financial Conduct Authority. Two Sigma Investments has also built a short position in 2.17 per cent of Flutter’s total London-listed shares – now the largest short position – up from 0.61 per cent at the end of 2025.Other funds that have taken short positions against Flutter so far this year include AQR Capital Management, Marshall Wace and Balyasny Asset Management.Marshall Wace, Millennium International Management, and Capital Fund Management have all shorted Entain. Marshall Wace has held the largest net short position so far in 2026, as much as 1.7 per cent of Entain’s shares in April, but has since partly cashed in the bet.Marshall Wace, Capital Fund Management, AQR Capital Management, Two Sigma, Balyasny Asset Management and Millennium declined to comment. DE Shaw did not respond to a request for comment.Not all short bets have come good, however. Funds holding positions this year against Evoke, owner of William Hill and 888, have lost about $3.5 million, according to S3 Partners, after the company – one of the hardest hit by UK tax rises – rebounded more than 50 per cent from its December lows amid reports of takeover talks with gaming operator Bally’s Intralot.In the US, Barclays’ Montour anticipates a possible “relief rally” for both Flutter and DraftKings, as prediction markets also face rising scrutiny, legal disputes over whether they should be treated as gambling and fears that they could be facilitating a new wave of insider trading.Copyright The Financial Times Limited 2026