Back in February this year, the market was reckoning with the biggest short squeeze since the meme stock frenzy of 2021.
Even bigger, actually: Global hedge funds were exiting 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, according to Goldman Sachs (NYSE:GS).
The exits were in response to hedge funds being blindsided by the sharp rally in equities in the wake of the Federal Reserve’s 25-basis-point interest rate hike on Wednesday, 1 February.
They would be wise to get out of any remaining short positions – which are financial products designed to benefit from large declines in securities prices – if the latest data is anything to go by.
Research published by UBS this week showed that CTA funds (i.e. hedge funds that use managed futures strategies) are poised to unwind up to 60% of their current short positions.
UBS predicts that these CTAs will buy back as much as $60 billion (£48.9 billion) worth of global equities in anticipation of a resurgence in the global stock markets.
“They are back to maximal bullishness on the asset class,” as analysts put it.
They could be onto something, if, as HSBC Holdings PLC (LSE:HSBA) suggests, the market is beginning to price in interest rate cuts following a punishing two years of fiscal tightening implemented by central banks across the West.
“If the (US Federal Reserve) can engineer a soft landing, this would imply notable upside for equities,” said a team led by HSBC’s global equities strategist Alastair Pinder.
Running on the assumption that the world’s largest economy is able to avoid a recession, Pinder and company reckon the FTSE All-World Index could close 2024 at 480.
That prediction implies as much as a 9.5% upside to Wednesday’s index price.
Data suggests that the US benchmark S&P 500 index has rallied on average 22% in the six months following the end of a Fed hiking cycle.
If collective wisdom agrees, then we should expect hedge funds to ramp up their short exits in the coming weeks and months.
Alongside global equities, UBS data also pointed to a rebalancing of US dollar longs.
CTAs sold $20 billion worth of greenbacks last week; UBS’ model expects them to sell a further $90 billion to $100 billion, representing between 40% to 50% of remaining dollar longs, in the following two weeks.