US Hedge funds had to exit their losing bets quickly after increase in stock prices suddenly. This week, the stock markets have risen significantly, especially speculative stocks that were hit hard during the global sell-off of 2022. The hedge funds profited from the sell-off and were unprepared for the rebound, which has recently increased as investors believe that interest rates are close to peaking in many major economies.
The surge in short covering, when investors buy back stocks they have been betting against to reduce their losses, since November 2015, according to Goldman Sachs. The buying by hedge funds helped increase the Nasdaq index by 3.3% on Thursday.
The hedge funds closed their bets not only against US stocks but also against European companies. According to Goldman Sachs, the bet against stocks falling for a long time was under maximum pressure. The bank estimated that quantitative hedge funds lost about 1.3% on Thursday, their worst day in more than six months.
Stocks like Carvana and AMC Entertainment have hurt hedge funds this year. Carvana, an online car retailer, fell 98% last year but is up 200% in 2023. The short interest in the stock was at 30% on Thursday, compared to less than 5% a year ago. Short interest in AMC Entertainment, a cinema chain whose shares fell 76% last year but have risen 49% this year, was at 29%.
The rally in stocks that were hard hit last year has provided a big technical advantage for non-profitable tech companies and has hurt the hedge fund community, according to analysts at Goldman Sachs. According to analysts at Natixis, it is hard to go against the risk-on momentum. The market remains focused on the near end of the interest rate tightening cycle, therefore retail and meme stocks are performing well.
Despite the recent setbacks, hedge funds remain optimistic about the market’s future. Many believe the current situation is just a temporary and that the markets will recover soon. According to analysts, the key to success for hedge funds in the current market is to be patient and wait for the right opportunities. They recommend that hedge funds focus on undervalued stocks with strong fundamentals rather than making short-term bets on speculative stocks.
The sudden surge in stocks has taken many hedge funds by surprise. While some have suffered losses, many remain optimistic about the future and seek new market opportunities. It remains to be seen how the market will evolve in the coming months, but hedge funds will continue to play a major role in shaping its direction. Investors must always research and consider their options before making investment decisions.