Mega Squeeze Coming: Last Week Saw Biggest Hedge Fund Shorting Since May

Which brings us to the end of the week, when shortly after the biggest shorting in almost one year by some hedge funds, other hedge funds have decided to approach with WallStreetBets attitude and start a squeeze, with GS prime reporting that "hedge funds bought the US Mega Caps and Non-Tech Single Names yesterday" as "the GS Prime book was modestly net bought for a second day (+0.5 SDs vs. the average daily net flow of the past year), driven by moderate risk-off flows as short covers outpaced long sales roughly 3 to 1."

As GS prime details, the end of the week saw:

"the first net buying in three days (+0.9 SDs) driven by short covers in Macro Products and long buys in Single Names" even as "ETF shorts decreased -0.8% (-1.4% week/week; +24% YTD), driven by covers in Small Cap and Health Care ETFs which outweighed continued shorting in Corporate Bond ETFs. 8 of 11 sectors were net bought – Health Care (long buys > short covers), Real Estate (long buys > short covers), Consumer Disc (long buys > short sales), Consumer Staples (short covers), and Energy (long buys + short covers) were among the most net bought. On the other hand, Info Tech (short sales > long buys), Materials (long-and-short sales), and Industrials (long-and-short sales) were the only net sold sectors."

Curiously, Info Tech stocks - i.e., the biggest winners of 2020 - were net sold for a third straight day. That said, in $ terms, the net selling in the sector was ~75% of Wednesday’s activity and driven by short sales outpacing long buys (i.e., there was no significant long liquidation).

As a result of the whiplash, Goldman Prime calculates that "fundamental LS managers experienced another worst alpha day since Jan. 27, driven by sell-off in Momentum and Info Tech, and have lost 1.8% of alpha over the past three days."

What does all of this mean for markets?

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