Hedge funds erred as stocks rallied this week as they quickly exited losing bets in a market that is collapsing at its fastest pace in years.
Equity markets have rallied strongly so far this year, led by many of the most speculative stocks in the global sell-off of 2022. Many funds that benefited from the rout have found themselves poorly positioned to rebound, which has accelerated recently as investors realize that the rate of Interest rates are near their peak in many major economies.
The fallout from short-covering – when investors buy back challenged stocks to limit losses – was the biggest since November 2015, according to Goldman Sachs notes to clients reviewed by the Financial Times.
The scale of hedge fund buying, which helped the Nasdaq index rise 3.3 percent on Thursday, exceeded that seen in January 2021, when retail investors coordinated action on forums such as Reddit to post GameStop prices and other memes. stock rocketing, inflicting huge losses on some funds.
The fund hedges bets mainly on US stocks but also on European companies.
Bets against stocks that had previously fallen for a long time there “under MAX pressure”, Goldman wrote in a separate note on Friday seen by the FT.
“We saw it [an] explosive move higher” in software stocks “driven by consistent hedge fund closings [short covering] all sessions,” he 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 hedge funds have stung 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 – is at 30 per cent. cent on Thursday, according to S&P Global Market Intelligence, compared with less than 5 percent a year ago when the stock was higher.
Short interest in movie theater chain AMC Entertainment, whose shares fell 76 percent last year but are up 49 percent this year, are running 29 percent, just down from the start of the year.
The rally in hard-hit stocks last year “could provide a technical headwind for the tech world that’s been unprofitable and already hurting [hedge fund] systematic community”, wrote analysts at Goldman.
“It’s hard to fight risk momentum,” analysts at Natixis wrote. “The market remains focused and confident at the end [interest rate] tightening cycle. . . Retail/meme stocks are superior.”
On Wednesday the US Federal Reserve raised interest rates by a quarter of a percentage point, a smaller step than last year’s series of big hikes, on hopes that borrowing costs could rise.
However, some of that enthusiasm was dampened in stocks Friday by strong jobs data, which fueled fears that the Fed will need to keep rates higher to control inflation.
laurence.fletcher@ft.com