As Panicked Hedge Funds Covered Tech Shorts At A Record Pace, They Were Piling New Shorts In This Sector
On Friday, we first reported that according to Goldman's Prime Brokerage team, following the sharp post-FOMC/ECB/BOE market rally Thursday led by High Retail Sentiment (GSCBHRSB), High Beta 12M Losers (GSCBLMOM), and Most Short (GSCBMSAL) stocks, the bank's Prime book - a proxy for broader hedge fund exposure - saw "a sharp increase in de-grossing activity, driven by short covers and long sales."
What does that mean in notional terms? As Goldman's Vincent Lin explains, Thursday's de-risking, or de-grossing - short covers and long sales combined - was the largest since Jan '21 and ranked in the 99.9th percentile vs. the past 10 years. US and European equities made up ~64% and 35% of the notional de-grossing, respectively. That's right: hedge funds were so beared up going into the FOMC, the result was bloodbath as margin calls collided with stop losses and everything was sold with the bathwater.
What is even more remarkable is that as part of this wholesale unwind of HF exposure, Thursday 's short covering was the largest since Nov '15 (exceeding even Jan '21 during the meme frenzy) and ranks in the 99.8th percentile vs. the past 10 years. US and European equities made up ~61% and 38% of the notional short covering, respectively.
Let's dig a little deeper into Thursday's HF activity: according to GS Prim, and this should come as no surprise - after all we have discussed the relentless shorting of tech for the past month (see "We Are Setting Up For A Tech-led Squeeze Higher As Shorting Gets Extreme"), "Info Tech was among the best performing and by far the most notionally net bought US sector on the Prime book this week, driven entirely by short covers outpacing long sales ~6 to 1." Some more details from the GS Prime report (available to pro subs in the usual place):
US Info Tech was net bought for a 4th straight week and this week saw the largest notional short covering since Jan ’21 (99.6th percentile vs. the past 5 years). Nearly all subsectors saw short covering on the week, led in notional terms by Semis & Semi Equip, Tech Hardware, and IT Services.
Amusingly, there have been so many shorts in tech accumulated over the past year, the squeeze will likely go on for much longer, to wit:
Despite the recent net buying/short covering activity, hedge fund net positioning in Info Tech remains relatively low: sector long/short ratio now stands at 2.14, in the 22nd percentile vs. the past year and 6th percentile vs. the past 5 years.
Again, none of this is news, and is a continuation of the same technicals which we have been discussing since the start of the year.
What will come as a surprise to most, however, is that as hedge funds were furiously covering tech shorts, they were piling up shorts in another sector. According to GS Prime, "energy was the worst performing and also the most notionally net sold sector globally on the Prime book this week, driven almost entirely by short sales."
According to Goldman Prime's Vincent Lin, this week’s notional net selling was the largest in 8 months and ranks in the 99th percentile vs. the past 5 years, as the sector was net sold in all regions most notably in the US. Energy ETFs, Oil & Gas Equip & Svcs, Integrated Oil & Gas, and E&P stocks were among the most net sold.
The surge in shorting in just the past two days, means that hedge fund net exposure in US Energy (as % of the overall Prime book) now sits in the 57th percentile vs. the past year and 65th percentile vs. the past 5 years.
Furthermore, on a relative basis vs. SPX, the Prime book is now modestly U/W by -0.5%, which is in the 58th percentile vs. the past year and 74th percentile vs. the past 5 years, and the aggregate US Energy long/short ratio now stands at 1.90, in the 26th percentile vs. the past year and 60th percentile vs. the past 5 years.
Translation: just as tech is now outperforming every other sector as a result of a seemingly endless short squeeze, the same hedge funds which are rapidly degrossing as they have no idea what to do... are apparently convinced that the sector to short is energy despite a near record buyback announced by Chevron and record cash flow from Exxon. Translation: they are about to be steamrolled again, only instead of tech, the next big squeeze will be in energy as all those recent shorts are violently unwound.
More in the GS Prime note available to pro subs.