Hedge funds lost $43 billion due to stock market rally

Bets that the US and European markets would decline resulted in hedge funds losing $43 billion.

Stocks' gains were bolstered by US inflation data.

The S&P 500 could potentially have its best month since July of last year in November.

Research firm S3 Partners reported that hedge funds that had sold American and European stocks lost a total of $43.2 billion last week.

Hedge funds suffered their greatest losses from short positions against stocks in the IT, healthcare, and non-essential consumer goods sectors. For example, RBC reports that a 14% rise in Carnival Corporation's share price cost hedge funds $240 million.

A short squeeze in recent days has caused hedge funds to purchase back their short positions, resulting in a market rally and higher prices.

Barclays believes that the short squeeze will have a detrimental effect on the performance of many hedge funds by the end of this year, which has been a very challenging market.

Following US inflation data that was lower than expected, stocks rallied and confidence was reinforced that the Fed's rate hike cycle is finished.

The market is almost certain that the rate will stay at 5.25–5.5% at the December Fed meeting, with a 99.5% probability. The remaining 0.5% is attributed to the possibility of a 50 bps rate cut. A rate increase is not being taken into account.

Since the start of November, the S&P 500 index has seen an increase of over 8%, while the Nasdaq has risen by approximately 11%. This could be the most successful month for the S&P 500 since July of last year.

The Barclays index, which tracks the performance of the most widely-shorted European stocks, has seen a 10% increase over the past three weeks, marking its largest monthly gain in the past decade.