Short squeezing is back in vogue two years after the great meme stock frenzy sent hedge funds into a panic in 2021.
In a Goldman Sachs (NYSE:GS) note seen by Reuters, global hedge funds exited their short positions at the fastest pace since 2015, eclipsing the mass exodus witnessed in 2021 when activist traders rallied around AMC, Gamestop and Bed Bath & Beyond.
Short squeezing works by opening a high volume of positions on a stock that is otherwise being pushed down by institutional short sellers betting on the stock to fall in price.
Since short sellers could theoretically rack up infinite losses if their bet goes awry, they tend to exit their positions as fast as possible.
Back in 2021, retail investors gathered on the /wallstreetbets subreddit chat forum and retail investment platform Robinhood (NASDAQ:HOOD) to pump the price of these meme stocks to ‘own’ the hedge funds.
While hedge funds clocked up billions in losses, a Securities and Exchange Commission post-mortem concluded that the impact on institutional investors was negligible, though that did not stop a congressional hearing before the House Financial Services Committee from going forward.
The latest squeeze is more prosaic in nature, with hedge funds being blindsided by the sharp rally on equities in the wake of the Federal Reserve’s 25 bps interest rate hike on Wednesday, February 1.
Benchmark US index S&P 500 high a five-month high, while the FTSE 100 in London hit an all-time high as markets shifted into riskier assets on the assumption that rate hikes had finally reached their peaked.
According to the Goldman Sachs (NYSE:GS) note, the largest short positions held by hedge funds were in industrials and IT companies. Hedge funds also exited many long positions in Asian developing markets and Chinese equities in the trading sessions follow the Fed call.
Equities have cooled off this week, but the S&P 500 remains over 7% higher year to date, while the FTSE 100 remains around 4% higher.