Based on Goldman Sachs’ review of recent 13F filings, the consumer discretionary sector seemed to account for a big chunk of hedge funds’ net weighting. Short interest data shows that this sector makes up for 17% of all short positions. Putting it in the perspective of hedge funds’ overweighting in consumer discretionary on the long side, it would appear that they love and hate the sector at the same time.

Short interest days to cover

In Goldman’s estimate, 85% of short positions in stocks are held by hedge funds. By that logic, it is valuable to look into where bearish interest is rising and where it is waning. The report noted that the days to cover metric has been rising and has hit three days, the highest since 2005.

Short exposure to ETFs is mainly used by hedge funds as a hedging tool. Goldman Sachs estimates that hedge funds hold $135 billion in short ETF exposure, which makes up for 80% of these funds’ entire ETF portfolio. Short exposure to ETFs is massive when compared to single-stock short positions, which equals a value of $558 billion or just 29% of the gross exposure in stocks.

Source: Goldman Sachs

Neustar under a storm of short interest

Over the last quarter, short interest in a few stocks shot up significantly. Among them is Neustar Inc (NYSE:NSR), a diversified telecommunication industry player. Short interest hit 37% at the end of June, up from 22% at the end of Q1. There has been some talk of Neustar’s sale, as reported by Reuters, however, nothing has been made official yet. The stock was battered in the second quarter after Neustar lost a government contract to Telecordia Technologies, a subsidiary of Ericsson.

One of David Einhorn’s holdings, Sunedison Inc (NYSE:SUNE), is also getting a lot of heat from shortsellers. Short interest increased from 20% to 25% in the June quarter.

Mallinckrodt shares gain +40%

A new entrant in the most-shorted list from Goldman Sachs is Mallinckrodt PLC (NYSE:MNK), a specialized pharmaceuticals company. Short interest in Mallinckrodt doubled to finish the quarter at 27% of the company’s market cap. Meanwhile, hedge funds were also aggressively buying the stock as the company acquired Questcor Pharmaceuticals in a deal worth $5.6 billion. Among those who established longs in MNK over the past quarter was David Einhorn’s Greenlight Capital. However, Greenlight merely bought the MNK long to hedge against its short in Questcor. The fund exited its MNK long with a profit. Greenlight highlighted MNK as a short candidate going forward in its quarterly letter.

“Given that QCOR is larger than MNK, and MNK is going to lever-up to buy QCOR, we believe that MNK is setting itself up to be a very attractive short sale candidate if the merger is completed.”

Barry Rosenstein’s JANA Partners and Paulson & Co. increased their positions in Mallinckrodt in Q2. Paul Singer’s Elliott Management and Tiger Global bought new positions in the company over the same period. Shares of MNK have gained 43% YTD.

Questcor Pharmaceuticals Inc (NASDAQ:QCOR) is a long position of Paulson & Co and Farallon Capital.

Short interest in semiconductor equipment maker GT Advanced Technologies Inc. (NASDAQ:GTAT) rose from 27% to 30% over the last quarter.

J.C. Penney shakes off some shorts

Short interest retracted in some stocks as well. J C Penney Company Inc (NYSE:JCP) saw its short position slip from 36% of outstanding shares to 28% at the end of June. Shares of JCP have gained 18% so far this year.

Aero industry’s Gencorp Inc (NYSE:GY) was covered by a lot of shortsellers, as short interest dropped from 33% to 25% in Q2.