Marking "The Beginning of the End of the War"! Hedge Funds Close U.S. Stock Short Positions at Fastest Pace Since 2020

Hedge funds are closing out U.S. stock short positions at the fastest pace since the COVID-19 pandemic, as a key structural market shift unfolds. According to a Bloomberg report on Thursday, Goldman Sachs Group's trading desk disclosed that following Trump's announcement of a temporary ceasefire agreement with Iran, hedge fund managers significantly accelerated the closing of short positions related to macro products, involving major indices and exchange-traded funds (ETFs). Goldman Sachs stated that the scale of this unwinding is poised to match levels seen during the early stages of the 2020 pandemic. John Flood, Head of Americas Equities Execution Services and Partner at Goldman Sachs, wrote in a note to clients: "This is the exit the market has been waiting for." He added that investors he spoke with generally believe this action very likely marks "the beginning of the end of the war." This wave of short covering is fueling a major rally in U.S. stocks on Wednesday, with major indices gaining more than 2%, marking the largest single-day increase since March 31—when the S&P 500 rose nearly 3% amid market speculation that Trump was eager to extricate himself from the conflict launched in late February alongside Israel. Short Positions Reach Highest Levels Since Pandemic The backdrop to this unwinding is the persistent bets hedge funds had previously made that U.S. stocks would fall further. Data from Goldman Sachs' prime brokerage shows that hedge funds' short exposure to U.S. macro products (including indices and ETFs) has climbed to 12% of total gross exposure, the highest level since the pandemic. This positioning stemmed from dual concerns triggered by oil price shocks—that they could drag down U.S. economic growth and reignite inflationary pressures, causing persistent market pessimism about U.S. stock prospects. Now, with the ceasefire news confirmed, the basis for this logic has been shaken, leading to large-scale unwinding. Short covering itself has a price-boosting effect: short selling typically involves borrowing securities and selling them, betting on a lower price to buy them back later. Once covering becomes concentrated, the buying behavior of investors directly drives up stock prices. Moving from "Frozen Phase" to "Short Squeeze Phase" John Flood characterized the current market state as a phase transition. "The frozen phase is over; we are now in the short squeeze phase," he stated. In fact, as early as the beginning of March, Flood warned that the overall positioning of hedge funds in U.S. stocks had set the stage for a significant rebound, predicting that short covering in macro products alone could drive the S&P 500 up by 2% to 3%. Goldman Sachs' trading desk expects sectors that benefited from the "war trade"—including energy, bulk chemicals, and defense—to face near-term correction pressure as hedge funds take the opportunity to lock in profits. Meanwhile, heavily shorted consumer discretionary sectors, particularly stocks related to the housing industry, are expected to see the most sustained short covering rally. Offensive Phase May Begin, Long-Term Capital Poised to Enter Flood also issued a forward-looking signal, suggesting the market will enter an "offensive phase" in the coming days, coinciding with the start of earnings season. He expects long-only investors to rotate back into pre-war leaders, including memory chip manufacturers and semiconductor stocks. "Asset managers and sovereign wealth funds have been on the sidelines since the outbreak of the war," Flood said. "This ceasefire is very likely to prompt them to start going on the offensive again." This implies that if the ceasefire is consolidated, potential incremental buying in the market will not only come from short covering but also from the re-entry of long-term institutional capital that had been sitting idle. The overlay of these two forces could provide more sustained upward momentum for U.S. stocks. Risk Warning and Disclaimer Markets involve risk, and investment requires caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are appropriate for their specific circumstances. Investing based on this information is at your own risk.