As per the article I wrote yesterday28 Jan 2021 07:54
* Short-seller favourites such as Pearson, Evotec, Klepierre and CD Projekt jumped on Wednesday even as the broader market sank. Their gains are far from reaching the levels of U.S. shares like GameStop and AMC Entertainment, propelled by bullish day-traders, but short sellers are feeling the pinch.
* “Hedges are definitely closing out some shorts” says Patricia Shin, Global head of execution at Kepler Cheuvreux, noting the Goldman Sachs EU Most Rolling Short basket has been surging. “This shows that some are hedging the risk of a bigger short squeeze in Europe,” she adds.
* “I would be careful about seeing this as a case of the Reddit crowd finding new targets right now,” says Neil Wilson, chief market analyst at Markets.com. “It is likely down to short covering as hedge funds back out of their positions in light of what has happened to heavily shorted stocks like Gamestop. This is very much about managing risk.”
* “A retail army chasing manias (Tesla) and fads (Nikola) is nothing new, but looking at the fireworks that happened over the last week in name like GameStop, AMC or Blackberry is simply mind-boggling,” says Oliver Scharping at Bantleon Asset Management. “I know of some high-profile funds who got absolutely hammered and incurred massive mark-to-market losses, not because their thesis was wrong, but simply because they were crushed under the collective weight of a few thousand Robinhood retail perma-bulls.”
* The moves may be less pronounced in Europe, given a less active retail market than in the U.S., but funds losing bets on U.S. names may be forced to seek liquidity on other positions they hold. The current frenzy, which began on Reddit’s WallStreetBets forum, has hyped previously-unloved stocks like GameStop and Blackberry, pummelling funds including Melvin Capital and Citron Capital.
* “There is the possibility that we might see some further short covering in Europe,” says Alberto Tocchio, a portfolio manager at Kairos Partners. Tocchio says the “de-grossing” started with retail and is ending with hedge funds covering shorts and selling longs. This may explain the recent underperformance of crowded favorites like lockdown winners Zur Rose and Delivery Hero, or green plays such as EDP Renovaveis and Vestas.
* “I would think all hedge funds are taking a good hard look at all their short positions and deciding whether they are worth it,” Markets.com’s Wilson says. “Shorting can result in potentially infinite losses, so the risk management is always against you if the flows are there from buyers,” he adds.