In this week’s update of the Tactical Positioning Monitor, we see that high short interest (SI) stocks have finally started to outperform the broader market, with the JPMorgan High Short Interest Index (JPTASHTE) outperforming the S&P 500 by almost 10% over the past 10 days. While this could be a sign of accelerated outperformance for shorts, it’s important to note that Quant de-grossing and short covering have yet to pick up significantly, suggesting that flows in shorts may not be over anytime soon.

For hedge funds, the grind higher was not particularly helpful, with shorts generally outperforming longs over the week. As a result, average hedge fund returns remained at +1.1% for the month, despite the MSCI AC World Index now up 3%. Equity long/short funds are still around +1.3% globally, while equity quant funds have seen a slight decline on a market-neutral basis (-0.3% globally).

From a flow perspective, overall US gross flows were flat and gross leverage was unchanged across hedge funds (all strategies’ gross leverage still at ATHs). Hedge funds were small net sellers in the US and globally, resulting in a 2% decline in net leverage across all strategies (though net remained flat among equity long/short funds). However, other flow dynamics were more positive, such as ETFs, cyclical/defensive flows, etc., which kept the one-week and four-week changes positive for our Tactical Positioning Monitor, with its level ticking up to +0.5z (76th percentile).

It’s worth noting that retail investors remain more bullish in their option flows, which could suggest that hedge funds may end up covering shorts more quickly before their outperformance is over. Therefore, while the recent performance of high short interest stocks is promising, it’s important to keep a close eye on flows and positioning to determine if the rally in shorts will continue or if hedge funds will begin to cover their short positions soon.