LONDON (Reuters) - Hedge funds ditched bearish stock bets early this week at some of the highest rates in three years as U.S. meme stocks rallied sharply, a Goldman note seen by Reuters on Friday showed.

The note, published on Wednesday just before the rally faded, said hedge funds dropped positions on the most actively shorted stocks tracked by a Goldman Sachs index. These funds also piled into long bets just as retail investor favourites, GameStop and AMC soared on the return of social media account "Roaring Kitty" -- a central player in the 2021 meme-stock rally.

A short position is a bet that the value of an asset will fall, whereas a long position wagers it will rise.

Most hedge fund short covering, when investors have to buy back stock borrowed for bearish bets, came from stocks tracked in the Goldman Sachs index, the bank's note said. This index includes AMC and GameStop, according to Yahoo Finance.

The index, which rose by over 5% during the week, was up just 0.5% on Friday, LSEG data showed.

Systematic hedge funds, whose algorithms catch market trends, piled into long positions on Monday, while losing about 1.1% by Tuesday, the cohort's second worst day of the year, Goldman Sachs prime brokerage, which tracks hedge funds, said in the note.

However, the group remains up 11.6% for the year to May 14, the Goldman note showed.

Hedge funds taking long and short bets based on fundamental factors were down 0.3% on Wednesday but up 7% for the year so far.

GameStop and AMC fell for a second straight session on Thursday, as the "Roaring Kitty" excitement died down.

Shares of the videogame retailer GameStop tumbled 30% to close at $27.67 after jumping as high as $64.83 on Tuesday. Theatre chain AMC closed 15.3% lower at $4.64.