Capitulation: Funds burn amid biggest short covering since March

The latest record liquidation and short sales observed by institutional funds in the ominous “other” category of the CFTC will prove to be a torment for the bears…

…this means that the record bearish sentiment observed during the last market rally – contributing to the S&P’s return to positive territory for 2025 – will persist and even accelerate, pushing stocks even higher.

However, all of this suddenly changes after the explosive stock growth on Monday, which happens after the tariff truce reached over the weekend in Geneva (and which we now know was planned during a secret meeting in late April between Chinese and U.S. representatives in Washington). Then, global stocks in the Goldman Prime Brokerage book recorded the second-largest nominal net purchase in the last five years (+4.3 sigma), driven by short covering and, to a lesser extent, long purchases (a ratio of 1.6 to 1). All regions were net bought, led by North America and to a lesser extent Europe (both driven by short covering).

Digging deeper into the Goldman HF Prime report (available to professional subscribers), we learn that hedge funds are net buying U.S. stocks at the fastest pace since April 9th (+4.0 sigma for the year), led by short covering and long purchases (a ratio of 1.5 to 1). Individual stocks and macro products are net bought, comprising 53% and 47% of the total nominal net purchase, respectively, driven by short covering and long purchases.

Eight of the eleven sectors in the U.S. are net bought, with the largest nominal purchases in “Information Technology,” “Consumer Goods with High Demand Elasticity,” “Healthcare,” and “Industrials,” while “Financials,” “Consumer Staples,” and “Communication Services” are the only net sold sectors.

Staying focused on the U.S., yesterday’s nominal short covering in individual stocks was the largest since March 7th and fell within the 99th percentile for the past five years. Managers are also reducing their macro hedges – short positions in U.S.-listed ETFs have been net covered by -4.2%, the largest one-day percentage decrease since April 9th (-4.9%).

However, before we conclude that bearish pressure has completely disappeared, it should be noted that gross leverage – a proxy for hedged exposure – is rising to new multi-year highs, while net leverage (and the long/short position ratio) remains extremely low for Equity L/S managers even after the latest increase:

Entire Prime book:
Gross leverage +2.3 points day-over-day to 290.6% (a 5-year high).
Net leverage +2.6 points to 73.2% (12th percentile for 1 year, 41st for 5 years).

Global Fundamental L/S strategies:
Gross leverage +0.9 points to 206.5% (also a 5-year high).
Net leverage +2.7 points to 50.2% (12th percentile for 1 year, 17th for 5 years).

In other words, while a significant portion of short positions are being covered, there is still quite a bit left to cover.