According to a Goldman Sachs research note, hedge funds betting against stocks globally exited those trades at the fastest rate since 2015, outpacing their exit from the meme stock frenzy two years ago.

The latest short squeeze, which indicates that stock prices rose so much that bearish bets became too expensive to hold, saw hedge funds caught off guard by a sharp rally in equities on Feb. 2 after the US Federal Reserve slowed the pace of interest rate hikes and markets expected rates to peak soon.

According to the Goldman note obtained by Reuters, the rate at which hedge funds exited bearish positions surpassed the rate at which retail traders collaborated to push shortsellers out of stocks such as videogame retailer Gamestop and movie theater operator AMC Entertainment Holdings in January 2021.

The 2021 meme stock buying frenzy began on the social media site Reddit, and at-home traders used retail trading platforms like Robinhood (HOOD.O) to boost the price of heavily shorted stocks like Gamestop. Many shortsellers were forced to exit their positions, and in some cases, funds restructured and returned money to their investors.

However, after a volatile two years, AMC and GME are now trading above their January 15, 2021 price levels, just before the meme stock frenzy began.

The short squeeze last week came after a post-Fed rally. The tech-heavy Nasdaq rose 3.25% on Thursday, its biggest one-day gain in over two months, led by 20% gains in Align Technology and Facebook parent company Meta Platforms.

This came just a day before a sharp selloff in global stocks on Friday, triggered by stronger-than-expected US job data.

Despite massive short covering, hedge fund managers do not appear to be more optimistic about market conditions. “Positioning isn’t ‘high,’ and it doesn’t appear that many investors are bullish,” JPMorgan’s Positioning Intelligence said in a note reviewed by Reuters, adding that hedge funds have added some shorts in highly shorted stocks.

The global stock market was down 0.7% as a result of Friday’s strong U.S. jobs report, which renewed concerns that the Fed may need to continue aggressive monetary tightening to keep inflation under control.

Still, the major stock indexes are up through Friday, led by the Nasdaq, which is up about 14% since the beginning of the year.

According to Goldman Sachs, fundamental long-short hedge funds gained 3.79% in January due to market exposure. Systematic long-short funds, which trade using algorithms, were down 0.50%.

According to the Goldman note, hedge funds’ largest short positions were in industrials and information technology companies. Last week, hedge funds also exited many long positions in Asian developing markets and Chinese equities, according to the report.

Resurgent risk appetite among some investors has also fueled rallies in the shares of so-called meme stocks since the beginning of the year, though many analysts are skeptical that the recent moves will be sustained.

(Adapted from Investment.com)

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