Confirmed as "the beginning of the end of the war"! Hedge funds are closing short positions in U.S. stocks at the fastest pace since 2020.

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Hedge funds are closing out U.S. stock short positions at the fastest pace since the COVID pandemic, signaling a key structural shift in the market.

According to Bloomberg on Thursday, Goldman Sachs' trading division revealed that, following Trump's announcement of a temporary ceasefire agreement with Iran, hedge fund managers significantly accelerated the covering of short positions related to macro products, involving major indexes and exchange-traded funds (ETFs).

Goldman stated that the scale of this round of covering is likely to match the levels seen at the onset of the pandemic in 2020. John Flood, Head of Equities Execution Services for Goldman Sachs Americas and Partner, wrote in a client report: “This is the exit the market has been waiting for.” He added that investors he spoke with generally believe this move is very likely to mark “the beginning of the end of the war.”

This wave of short covering is fueling Wednesday’s surge in U.S. stocks, with gains in major indexes exceeding 2%, marking the largest single-day increase since March 31 — when the S&P 500 rallied nearly 3% on speculation that Trump was eager to extricate himself from the conflict he launched with Israel at the end of February.

Short positions reach highest level since the pandemic

The backdrop for this round of covering is that hedge funds had been persistently betting that U.S. stocks would fall further.Data from Goldman’s prime brokerage shows hedge funds’ short exposure to U.S. macro products (including indices and ETFs) has climbed to 12% of overall exposure, the highest since the pandemic.

This positioning originated from the double concerns triggered by oil price shocks — potentially dragging down U.S. economic growth and reigniting inflationary pressures, keeping market sentiment towards U.S. stocks pessimistic. Now, with the ceasefire news, the foundation of this logic has been shaken, leading to large-scale covering.

Short covering itself has an upward effect: short selling typically involves borrowing and selling securities, buying them back at a lower price after a drop; when many shorts are simultaneously covered, the investors’ buying directly pushes up stock prices.

From ‘freeze phase’ to ‘short squeeze phase’

John Flood characterized the current market state as a phase shift.“The freeze phase is over; we are now in the short squeeze stage,” he said.

In fact, as early as early March, Flood had warned that hedge funds' overall position structure in U.S. stocks had laid the groundwork for a sharp rebound in prices, expecting that short covering in macro products alone could push the S&P 500 up by 2% to 3%.

Goldman’s trading division expects sectors benefiting from wartime trading — including energy, commodity chemicals, and defense — will face a correction soon, as hedge funds take profits. Meanwhile, the heavily shorted consumer discretionary sector, especially stocks related to housing, are expected to see the most sustained short covering rally.

Offensive phase may begin, long-term funds gearing up

Flood also gave forward-looking signals, stating the market will enter the “offensive phase” in the coming days, coinciding with the start of earnings season. He expects that pure long investors will rotate back to pre-war strong sectors, including memory chip makers and semiconductor stocks.

“Asset managers and sovereign wealth funds have been on the sidelines since the outbreak of the war,” Flood said, “The ceasefire is likely to prompt them to resume active buying.”

This means that if the ceasefire is solidified, the market’s potential buying momentum will not only come from short covering, but also from the reinvestment of previously dormant long-term institutional funds. The combined forces could bring more sustained upward momentum to U.S. stocks.

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