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Hedge-Fund Short Covering Seen as Big Driver of Nasdaq Rally

Bloomberg logoBloomberg 3/10/2021 Lu Wang and Melissa Karsh

(Bloomberg) -- The recent rally in the Nasdaq 100 has been referred to as an oversold bounce aided by a drop in bond yields. Beneath the surface, however, the surge was largely driven by hedge funds who were forced to pare their bearish bets to limit losses -- rather than genuine interest.

While those funds were net buyers of stocks for a fifth straight day, short covering outpaced long sales by a ratio of 4 to 1 on Tuesday, according to data from Goldman Sachs Group Inc.’s prime brokerage unit. As the spike in the tech-heavy gauge didn’t reflect appetite for risk, some analysts say those gains would likely be short-lived.

“We see yesterday’s move as short covering without legs,” said Andrew Brenner, the head of international fixed-income at NatAlliance Securities in New York.

chart, line chart: Hedge fund data suggest short covering behind Tuesday's equity rally © Bloomberg Hedge fund data suggest short covering behind Tuesday's equity rally

Short sellers had boosted their wagers as the Nasdaq 100 tumbled more than 10% from a February record. Last week, large speculators -- mostly hedge funds -- were most bearish on Nasdaq mini futures since early October, according to data compiled by Commodity Futures Trading Commission.

Those heavy bets set the stage for a short squeeze as the Nasdaq 100 surged 4% Tuesday, the most in four months. Among Goldman’s hedge-fund clients, short covering in unprofitable tech firms helped the group halt seven straight days of selling and score the third-biggest net buying of the year. Over the past two days, a Goldman basket of the most-shorted tech stocks has jumped almost 7% -- more than double the return of the Russell 3000.

The Nasdaq 100 climbed as much as 1.5% Wednesday before erasing gains. Volatility in the tech-heavy gauge is picking up as the stay-at-home trade lost some luster amid signs of an economic rebound.

Read more: Massive Nasdaq Rally Springs From Deepest Hole in Three Decades

(Adds CFTC data on Nasdaq futures positions in fourth paragraph)

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