Hedge funds betting on a decline in US and European stock markets have suffered an estimated $43 billion of losses in a sharp rally over recent days.
Short sellers, many of whom had built up bets against companies exposed to higher borrowing costs over the past year or so, have been caught out by a “painful” rebound in “low quality” stocks this month, said Barclays’ head of European equity strategy Emmanuel Cau, as cited in the Financial Times. That has come as the market has grown more confident that the US Federal Reserve’s cycle of rate rises is finally over.
The rally, which has left Wall Street’s S&P 500 index on track for its strongest month since July last year, was sparked by US Federal Reserve chair Jay Powell’s recent perceived reluctance to tighten monetary policy any further when he left rates on hold at the start of the month.
Analysts said the upswing triggered a brutal “short squeeze” in which some hedge funds repurchased stocks to cover their negative bets, which helped push share prices even higher.
“It’s been a very tricky market this year but this short squeeze is really killing year end performance for a lot of funds,” said Cau. “No one was able to monetize the rally in garbage stocks.”
The past month’s “easing of financial conditions may have caused some dead cats to bounce”, said Barry Norris, chief investment officer at Argonaut Capital, referring to the rebound in lower quality stocks.
Funds suffered $43.2 billion of losses on short bets in the US and Europe from Tuesday to Friday inclusive last week, according to calculations by data group S3 Partners, which do not take account of gains that funds may have made in other stocks they own.