In that scenario people who hold the stock already won't be...

In that scenario people who hold the stock already won't be increasing the short as the price goes down - their position would be stable unless they want to decrease the ratio further at whatever the price is.

The other factor is Neuren has 5.5% of stock being short sold is #39 on all short positions on the market. I don't know what the average is of all ASX 200 companies (but it could be worked out) but it seems like 5.5% is above that average by a reasonable amount.

That's why I think that hedging doesn't account for much of the outstanding short position.