Only 20% Of Recent Shorts Have Been Reestablished

Only 20% Of Recent Shorts Have Been Reestablished

As markets rallied back the past six days as the turmoil from the reddit short squeeze has faded, hedge fund performance has improved, and exposures have been added.

That said, as JPM calculated in an overnight note, the magnitude of active gross additions vs. the prior reductions remains fairly muted for Equity L/S funds across regions. In fact, only 20% or less of last week’s active gross reductions have been added back this week. Furthermore, with bears having been badly burned by the horde of WallStreetBettors (and their various hedge fund accomplices), short additions among the High SI stocks remain fairly muted this week which may explain the outsized performance of Hedge Fund VIP longs in recent days.

Other strategies which generally took off less gross, have added most of it back.  That said, gross exposure levels remain a couple % below its YTD high on 1/22, but net exposures globally are now up slightly over the past 2 weeks and up 8% YTD as a result of the short legs lagging according to JPM.

The lack or broad regrossing, coupled with increased asymmetric activity on the long side, which has further shrunk market liquidity could explain the violent move higher in recent days.

This is also why equity L/S fund performance has improved as longs outperformed shorts by 2-3% MTD, with JPMorgan noting that “given the market rally and high net exposures among the group, performance is likely close to flat YTD.”

Finally, which sectors/industries have seen the most gross/net added back? Here is the answer according to JPM:

  • In NA, TMT has seen the most re-grossing and has been net bought over the past week.
  • In EMEA, Banks, Autos, and Tech Hardware saw the most re-grossing over the past week, but net flows were slightly negative for all three groups, despite relatively strong returns.
  • In APAC, Financials and Health Care saw re-grossing this week, while Materials and Industrials were the most net bought.

In a separate analysis, Citi analysts warned that the short squeeze looks set to drive a further rally in the S&P 500 index. According to the bank, amid fears of forced squeezes nearly $10 billion worth of shorts were unwound last week on the S&P 500, the largest rate since April, and $21 billion shorts still remain and are in loss, analysts at Citi said.

“There is potential for further short squeezes supporting market gains for another week or two given the size of the remaining short base,” the Citi analysts wrote in a report late on Monday according to Reuters.

On the other hand, Citi calculated that at 4,000 on the S&P – or about 90 points away – longs could be tempted to take profit, potentially holding back the market in the short term.

Tyler Durden
Tue, 02/09/2021 – 15:40

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