Hedge funds that erred in the face of this week’s surge in stocks rushed out of losing bets as the market fell at its fastest pace in years.
The stock market has rallied year-to-date, led by many speculative stocks that were most heavily congested during the 2022 global sell-off. Many funds that profited from the habit have noticed itself is poorly positioned to recover, which has recently accelerated as investors feel that interest rates are close to peaking in many major economies.
The result was that the series of short-term offsetting operations – when investors bought back shares they had bet on to limit losses – was the largest since November 2015, according to a Goldman Sachs note sent for clients viewed by the Financial Times.
The size of hedge funds’ buying, which helped propel the Nasdaq up 3.3% on Thursday, has eclipsed levels seen in January 2021, when retail investors coordinated action. their on forums like Reddit sent the price of GameStop and other memes the stock skyrocketed, causing large losses for some funds.
The funds have closed bets mainly against US stocks but also against European companies.
Bets on stocks that have previously fallen for a long time are “under MAXIMUM pressure,” Goldman wrote in a separate note on Thursday seen by the FT.
“We have seen [an] boom higher” in software stocks “fueled by the right hedge funds [short covering] all sessions,” it added.
The bank estimated on Thursday that quantitative hedge funds lost about 1.3% that day, their worst day in more than six months.
Among the stocks that have worried hedge funds this year is online auto retailer Carvana, which fell 98% last year but will rise 200% in 2023. Short-term interest – a measure of size bet on stocks – at 30% per share. percent as of Thursday, according to S&P Global Market Intelligence, compared with less than 5% a year ago when its stock was much higher.
Short interest for cinema chain AMC Entertainment, whose stock fell 76% last year but has risen 49% this year, is now at 29%, down only slightly since the start of the year.
The rally in stocks that were hit hard last year “has likely created a major technical windfall for the nonprofit tech universe and has hurt [hedge fund] systematic community,” wrote analysts at Goldman.
Analysts at Natixis wrote: “It is hard to resist the risk appetite. “The market remains focused and assured near the end of the year. [interest rate] tightening cycle. . . Retail stocks/memes are doing better.”
On Wednesday, the US Federal Reserve raise interest rates by a quarter of a percentage pointA smaller move than last year’s series of big bulls, which raised hopes that borrowing costs could peak soon.
However, some of that enthusiasm was tempered on Friday by strong jobs data, which raised concerns that the Fed may have to keep interest rates higher to keep inflation in check.
laurence.fletcher@ft.com
