Hedge funds wrongfooted by a pointy surge in shares this week rushed to exit shedding bets on falling markets on the quickest tempo in years.

Fairness markets have risen sharply to date this yr, led by most of the speculative shares that have been clobbered hardest throughout 2022’s international sell-off. Lots of the funds that profited from the rout have discovered themselves poorly positioned for the rebound, which has not too long ago accelerated as traders sensed that rates of interest have been near peaking in lots of main economies.

The ensuing flurry of brief overlaying — when traders purchase again shares that they had been betting in opposition to to restrict their losses — was the most important since November 2015, in accordance with a Goldman Sachs observe to shoppers seen by the Monetary Instances.

The size of hedge fund shopping for, which helped gasoline a 3.3 per cent bounce within the Nasdaq index on Thursday, eclipsed that seen in January 2021, when retail traders co-ordinating their actions on boards akin to Reddit despatched the worth of GameStop and different meme shares rocketing, inflicting large losses on some funds.

Funds closed their bets primarily in opposition to US shares but additionally in opposition to European corporations.

Bets in opposition to shares that had beforehand been falling for a protracted interval have been “beneath MAX strain”, Goldman wrote in a separate observe on Thursday seen by the FT.

“We noticed [an] explosive transfer increased” in software program shares “pushed by constant hedge fund covers [short covering] all session,” it added.

The financial institution estimated on Thursday that quantitative hedge funds misplaced round 1.3 per cent that day, their worst day in additional than six months.

Amongst shares which have stung hedge funds this yr is on-line automobile retailer Carvana, which fell 98 per cent final yr however which is up 200 per cent in 2023. Brief curiosity — a measure of the scale of bets in opposition to the inventory — was at 30 per cent as of Thursday, in accordance with S&P World Market Intelligence, in contrast with lower than 5 per cent a yr in the past when its shares have been far increased.

Brief curiosity in cinema chain AMC Leisure, whose shares fell 76 per cent final yr however have risen 49 per cent this yr, is operating at 29 per cent, solely a slight discount for the reason that begin of the yr.

The rally in shares that have been exhausting hit final yr “has possible offered a giant technical tailwind for the non-profitable tech universe and has been hurting the [hedge fund] systematic group”, wrote analysts at Goldman.

“It’s exhausting to battle the risk-on momentum,” wrote analysts at Natixis. “The market stays targeted and reassured by the close to finish of the [interest rate] tightening cycle . . . Retail/meme shares are outperforming strongly.”

On Wednesday the US Federal Reserve raised rates of interest by 1 / 4 of a share level, a smaller transfer than its sequence of huge hikes final yr, which raised hopes that borrowing prices could quickly peak.

Nonetheless, a few of that enthusiasm was tempered on Friday shares by robust jobs knowledge, which revived fears that the Fed could need to preserve charges increased to regulate inflation.

laurence.fletcher@ft.com