Whether it’s forced selling to cover losses on short sales or simply the fate of high-beta bets in a rout, stocks that hedge funds have shown enthusiasm for in the past were again leading the way down Wednesday.
The Goldman Sachs Hedge Industry VIP ETF (ticker GVIP), tracking their most-popular stocks headed for the worst day since October. Some of its members suffered declines that exceeded 4%, including Caesars Entertainment Inc., which owns of a resort chain, and Carvana Co., an online retailer of used vehicles.
In addition to names tied directly to hedge funds, Wednesday’s plunge widened to encompass stocks in the broader category of “recent winners.” First among those was the ARK Innovation ETF (ticker ARKK), which surged about 150% last year with wagers on momentum-driven tech stocks. The fund managed by Cathie Wood dropped as much as 4.7% before recovering. Another winner turned loser was Invesco Solar ETF (ticker TAN), which slipped 4%. It nearly tripled in the second half of 2020.
“If you’re getting killed on your shorts and need to close those out and reduce overall exposure, you’re going to go first to big winners that have done well,” said George Pearkes, global macro strategist at Bespoke Investment Group LLC.
Hedge funds are under fire as retail traders whipped up in chat rooms charge into heavily shorted names, fueling squeezes in stocks from GameStop Corp. to AMC Entertainment Holdings Inc. Such a squeeze has prompted money managers to cut back risk. Gross leverage, or a gauge of hedge-fund risk appetite that takes into account long and short positions, on Monday experienced the largest active reduction since August 2019, data from Goldman Sachs show.
Most-shorted shares are surging again Wednesday, with a Goldman Sachs basket of such stocks jumping 10%. The group has rallied 54% in January, poised for the biggest monthly gain on record.
This article was provided by Bloomberg News.