Hedge funds rush to unwind bearish stock positions

By Carolina Mandl and Nell Mackenzie

NEW YORK/LONDON (Reuters) - Global hedge funds rushed to unwind bets that U.S.-listed stocks will fall, as a persistent rally threatens their performance, JPMorgan Chase and Goldman Sachs told clients in reports.

"For hedge funds, shorts have been a challenge since early June especially," JPMorgan said, adding the unwinding of short positions got "extreme" in recent days.

Goldman Sachs said in a note on Friday short covering in the so-called U.S. macro products, which include equity index and exchanged-traded funds, reached the largest amount seen since November 2020.

A U.S. bull market has caught portfolio managers off guard, as they positioned earlier in the year for an economic downturn amid interest rates hikes, sticky inflation and geopolitical tension. Such short covering could, in turn, give fuel to the equity rally, further complicating the picture for remaining short-sellers.

The performance of the main U.S. indexes, however, has challenged their gloomy positions. The Nasdaq skyrocketed over 42% this year and the S&P 500 surged over 17%, while a basket of the most-shorted U.S. stocks is up 40% since early May, JPMorgan said.

The outcome for hedge funds has not been good. Overall, hedge funds went up 3.45% in the first half of the year, lagging the main stock indexes.

Amid the rally's persistence, investor sentiment has turned more positive, JPMorgan added in its note dated July 13.

Net buying, which excludes stocks sold, reached its largest level since October last year, according to Goldman Sachs. The move, however, was mainly driven by investors buying shares to cover their short positions.

Still, hedge funds also shorted more single stocks, mainly in sectors like staples, communication services and info tech, according to Goldman Sachs.

Goldman Sachs and JPMorgan run two of the world's biggest prime brokerages, a banking sector provides lending and trading services to investors and is able to see how large hedge funds and asset managers are moving.

(Reporting by Carolina Mandl, in New York, and Nell Mackenzie, in London; Editing by Nick Zieminski)

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