Reddit forums have been in a frenzy over the past 48 hours, with Goldman Sachs bulk brokers saying several of retail investors’ favorite stocks surged on Wednesday as U.S. stocks saw the largest short-covering in a single stock since mid-March. U.S. stocks saw moderate buying on the day, but it was driven by safe-haven money – short-covering outpaced the size of the long side by a ratio of 3 to 1.
Wednesday saw an unexpectedly violent rally in heavily shorted Meme stocks, pushing Goldman Sachs Tracking Retailers (GSCBHTBR) all the way higher, with the favorites up 25% yesterday and 61% in the last 7 trading days!
Goldman Sachs notes that 10 of the 11 sectors (real estate being the only exception) saw net short covering. Communication services, non-essential consumer goods, information technology, health care and energy led the gains.
With such a market, most fund managers underperformed on the day, especially those with long-short equity strategies (long-short equity strategies typically hold long positions in stocks with excellent return characteristics and short stocks with poor prospects). Goldman Sachs stated bluntly.
“This is the worst day for hedge funds in almost 3 months.”
As much as hedge funds were hurt on Wednesday, it was nothing compared to what happened in late January. What Goldman Sachs pointed out is that if a similar short roll had occurred in January, it would have been about seven times as intense as Wednesday’s.