In a recent report by the Financial Times, it was revealed that hedge fund short sellers have suffered heavy losses as stocks continue to rally. The surge in markets has led to a short squeeze, resulting in an estimated $43 billion in losses for these firms.
The rally in stocks during the month of November has caught many hedge funds and money managers off guard, as they had bet on stock prices falling. The optimism surrounding the Federal Reserve’s decision to halt interest rate hikes has contributed to this market momentum, with the S&P 500 on track for its best month since July 2022.
Institutional investors who had placed short bets against companies in anticipation of a higher-rate environment are now facing challenges as confidence returns to the market. According to analysts, some hedge funds have been forced to repurchase stocks to cover their short bets, resulting in a “short squeeze” that has pushed share prices even higher.
Data from S3 Partners indicates that bets against the technology, healthcare, and consumer discretionary sectors have been particularly painful for hedge funds. For example, Carnival Corp’s stock jumped 14% in the week before Monday, costing short sellers about $240 million.
Meanwhile, a Goldman Sachs index tracking the S&P 500 names with the highest total dollar value of short interest outstanding is on pace for its best month since last October. Additionally, strategists at DataTrek Research believe that stocks will continue to move higher through the end of the year, citing low sector correlations as a sign of investor optimism.
“The bottom line here is that we believe US equities will continue to rally in the coming weeks,” the strategists maintained.
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