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Hedge Funds Are Puking Longs To Cover Short-Squeeze Losses

•, by Tyler Durden

Yet for once (it would appear), wallstreetbets is actually behind the market, because a quick look at some of the industry's favorite longs shows that they got hammered just as the most shorted names were soaring, as hedge fund sharks - smelling blood in the water - starting taking bites out of their wounded peers. Smid-cap hedge fund growth darlings like Roku, Peloton and Square tumbled as much as 6% on Tuesday as the short squeeze rampage entered into its third day. Not coincidentally, Bloomberg notes that Goldman's Hedge Fund VIP ETF which tracks hedge funds' most popular stocks, slumped for a fourth straight day, the longest stretch since October even as the company's basket of most-shorted names soared 15% during the same period.

It appears we were on to something as Goldman Sachs is out with a note this morning warning of exactly this...

Unprecedented divergence by historical standards: Despite being not profitable or running challenged business models, our most shorted basket rallied +300% off March lows. The desk notices that most shorted names tend to outperform during periods of reflation on renewed opportunism on higher growth potential for challenged companies. However, the magnitude of this move has far exceeded our expectation and pushed our most short basket to a 6% premium above sell-side consensus price target (first time since our baskets went live) and 85% above 200-day ma while short interest as of float of the market hits the lowest levels since 2012. Moreover, the acceleration of most rolling short names of late has been mostly a function of multiple expansion with little positive catalysts/development on the fundamental side. History suggests that heavily shorted names are likely to underperform in the weeks following +2 std outperformance.