Hedge Funds Execute Largest Short Squeeze Since Pandemic as U.S.-Iran Ceasefire Ignites Markets

Goldman Sachs reports the fastest hedge fund short covering since 2020 as a U.S.-Iran ceasefire deal sparks a historic 1,300-point rally in the Dow.

By: AXL Media

Published: Apr 9, 2026, 5:18 AM EDT

Source: Information for this report was sourced from Seeking Alpha and Bloomberg

The Largest Liquidation of Bearish Bets in Six Years

According to data from Goldman Sachs' trading desk, hedge fund managers were forced to close out short positions at a pace not seen since the height of the COVID-19 market panic. The "Islamabad Accords"—a 14-day truce between Washington and Tehran—caught many professional investors off guard, leading to a violent "short squeeze." As stock prices began to skyrocket on the news, those who had bet on a prolonged regional war were forced to buy back shares to limit their losses, further fueling the upward momentum of the S&P 500 and the Nasdaq.

Sectors Most Impacted by the Rapid De-leveraging

The rush to cover shorts was most pronounced in sectors that had been heavily shorted during the height of the conflict in March 2026. Technology and semiconductor stocks, which had faced immense pressure due to supply chain risks in the Strait of Hormuz, saw the most aggressive buying activity. Conversely, energy and defense ETFs, such as the Energy Select Sector SPDR (XLE) and the iShares U.S. Aerospace & Defense (ITA), saw significant outflows as the "war premium" collapsed. The de-leveraging process has effectively reset the market's technical landscape, removing much of the bearish overhang that had defined the first quarter of the year.

Impact on Leveraged and Inverse ETFs

The volatility triggered a massive surge in volume for leveraged and inverse exchange-traded funds. While long-leveraged funds like ProShares UltraPro S&P 500 (UPRO) saw record inflows, inverse funds designed to profit from market drops, such as the ProShares Short S&P 500 (SH) and the UltraPro Short QQQ (SQQQ), experienced catastrophic losses. For many retail and institutional traders using these instruments to hedge against geopolitical risk, the suddenness of the ceasefire resulted in a "forced liquidation" scenario, where margin calls required the immediate closure of positions.