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GameStop Resurgence Reinforces New Reality for Hedge Funds

gamestop-resurgence-reinforces-new-reality-for-hedge-funds

Investors have pared back their bearish bets a full month after the GameStop frenzy took off, showing the lasting effects of the Reddit-fueled saga on funds that make money by shorting.

Firms across the hedge-fund industry unloaded short positions that gain when stock prices fall, after a handful of stocks touted on Reddit and other social media platforms surged in January. They feared other stocks might experience the same meteoric rise.

The result: U.S. stock-picking hedge funds, which bet on and against stocks, are more tilted toward bullish bets than in any other period since 2010, Morgan Stanley ’s prime brokerage unit said in a note this week.

Short interest relative to the shares available to trade for stocks in the broad Russell 3000 index fell to 5.6% on Feb. 22 from 7.5% on Jan. 19, according to S3 Partners, a data-analytics firm. That follows a year-long pattern of hedge funds reducing their short bets as markets soared after March.

“This is the equivalent of the hack on Sony , ” said Bob Sloan, managing partner of S3, referencing the 2014 hack of the Hollywood studio that brought down its email and leaked sensitive data. “Everyone has looked around and said, ‘Wow, this could be me.’”

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