Hedge funds rushed to make the wrong exits from a sharp jump in stocks this week and lost bets as markets plunged at their fastest pace in years.
Equity markets have rallied sharply so far this year, led by several speculative stocks that were hardest hit during the 2022 global selloff. Many funds that benefited from the loss have found themselves poorly positioned for a rebound, which has accelerated recently as investors realized interest rates had peaked in several major economies.
The resulting flurry of short covering – when investors buy back shares they were betting on to limit their losses – was the biggest since November 2015, according to a Goldman Sachs note to clients seen by the Financial Times.
The hedge fund buying spree, which helped the Nasdaq index jump 3.3 percent on Thursday, eclipsed that seen in January 2021, when retail investors coordinated their actions on forums like Reddit to price GameStop and other memes. Sent. Stocks rallied, leading to heavy losses for some funds.
The funds closed their bets primarily against US stocks, but also against European companies.
Goldman wrote in a separate note seen by the FT on Thursday that bets against stocks that had previously been falling for longer periods were “under max pressure”.
“We saw [an] Explosive rise in software stocks driven by persistent hedge fund cover” [short covering] All sessions,” it added.
The bank estimated on Thursday that quantitative hedge funds lost about 1.3 percent on the day, their worst day in more than six months.
Among the stocks that hurt hedge funds this year is online car retailer Carvana, which fell 98 percent last year but is up 200 percent in 2023. Short interest – a measure of the size of bets against the stock – stood at 30 per cent. percent on Thursday, according to S&P Global Market Intelligence, compared with less than 5 percent a year ago when its shares were much higher.
Short interest in movie chain AMC Entertainment, whose shares plunged 76 per cent last year but are up 49 per cent this year, is trading at 29 per cent, a slight decrease since the start of the year.
The rally in hard-hit stocks last year has provided a huge tech tailwind for the nonprofit tech universe and is hurting the market. [hedge fund] Systematic Community ”, wrote analysts at Goldman.
“It’s hard to fight the momentum of risk,” the Natixis analysts wrote. “Market stays focused and confident until near end [interest rate] tightening cycle. , , Retail / meme stocks are performing strongly.
The US Federal Reserve raised interest rates by a quarter percentage point on Wednesday, a smaller step than last year’s series of big hikes, raising hopes that borrowing costs may soon peak.
However, some of that enthusiasm was tempered by strong jobs data in stocks on Friday, which revived fears that the Fed may have to keep rates higher to control inflation.