A Reuters strategist has commented on how hedge funds are at risk of short squeezes from retail investors despite their massive short leveraged bets.
Industry insights conducted by Goldman Sachs and other Wall Street giants show that hedge funds are doubling down on their bearish outlook, but that it could be dangerous if caught by heavy buying pressure.
For example, short interest now accounts for 41% of total open interest, a level not seen since February 2021, per Trade Algo.
It was during this time when AMC Entertainment was beginning to get injected by retail investor support before shares of the company skyrocketed over 3,000% to its all-time high in June.
Today, the original meme stocks, such as GameStop and AMC, continue to see intense shorting, while being backed by the retail community.
Now analysts are warning that coordinated buying as seen in 2021 during the meme stock frenzy, has the potential to wipe out billions in the hedge fund industry again.
“Shorting is hot again, but it’s a double-edged sword,” warned Emily Chen, a financial markets commentator at Reuters.
“If the market rebounds or retail investors target heavily shorted stocks, hedge funds could face substantial losses.”
The 2021 GameStop and AMC short squeeze demonstrated the perils of aggressive shorting when retail investors, coordinated via platforms like Reddit’s r/wallstreetbets and Twitter (now X), drove stock prices to astronomical levels, costing short sellers billions.
Goldman Sachs’ Hedge Fund Trend Monitor, released on May 20, 2025, reveals a significant uptick in short positions, with hedge funds increasing their bearish bets by $25 billion over the past three Commitments of Traders (COT) reports—the largest such increase in a decade.
Hedge fund leverage in equity positions has reached nearly three times their capital, a significant jump from 2.35 times just a year ago.
“Hedge funds are not just betting against the market; they’re leveraging up to make those bets count,” said Sarah Thompson, a senior analyst at TradeAlgo.
Is Short Squeeze Season Around The Corner?
According to insights from an S3 Partner expert, the combination of proposed tariffs by President Donald Trump and heavy short positions in certain stocks may create a perfect storm, driving panicked short sellers to cover their positions and sending stock prices soaring.
Short squeezes are typically triggered by a catalyst that sparks a rapid price increase, such as positive earnings surprises, regulatory changes, or through massive buying efforts from retail investors as previously seen with AMC and GameStop.
When short sellers scramble to cover, the increased demand for shares can lead to explosive price movements, particularly in stocks with high short interest—where a significant percentage of shares are sold short.
According to S3 Partners, a financial analytics firm, short interest in consumer discretionary stocks has surged, with some companies seeing 20% or more of their float (publicly available shares) sold short.
For perspective, a company with 10% or more short interest is already considered heavily shorted.
“The market is underestimating the adaptability of some of these companies,” notes Ihor Dusaniwsky, managing director at S3 Partners.
“A few positive surprises could light the fuse.”
Analysts like Dusaniwsky warn that the market is at a tipping point.
“Short sellers are heavily exposed, and any unexpected positive news could trigger panic covering.”
The question now is, will retail investors wait for external forces to trigger a short squeeze, or will they be the catalysts as they once were, to cripple Wall Street once again.
I’m curious to know what you think — leave your thoughts below.
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Also Read: Hedge Fund That Shorted AMC Is Now Liquidating
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