The Reddit-inspired short squeeze roiling markets has damaged optimism just as investors were starting to hope they could start to draw a line under last year’s COVID-19 turmoil and focus on a broad-based global economic recovery.

Stocks were slammed last week after amateur traders in the US bought up shares in out-of-favour companies that hedge funds had positioned against.

‘Perfect storm’

The Reddit short squeeze is a “perfect storm” agreed Richard Ivers, portfolio manager at Prime Value Asset Management.

It stemmed from “a really unusual confluence of events”, he said. They included increased interest in the stockmarket from stuck-at-home retail investors along with cash handouts from governments to support those hurt by pandemic job losses.

Given the uniqueness of the triggers for last week’s short squeeze, there’s little visibility on duration, he said.

“Fundamentally it does not make sense for these stocks to rise to the level that they are. At some point we’ll see reversion to fundamental value. But it’s hard to say what that would be.”

These things “can stay irrational for long periods of time”.

The fund manager is limiting portfolio exposure to technology companies and retailers. “They were very good performers last year and the drivers of that performance will be hard to sustain,” he said.

“It was the perfect set up and they exposed it,” said Matthew Haupt, portfolio manager at Wilson Asset Management, describing retail investors piling into hedge fund short positions last week.

“All these hedge funds run momentum strategies and have positions globally, so when they have to balance their risk books they just hose everything,” said Mr Haupt.

Read more in the Australian Financial Review.