Hedge funds stacked up equity shorts this month, bringing bearish exposure back toward levels not seen in years. Goldman Sachs' prime brokerage desk found that, across global stocks, shorting ran about five times the pace of new long positions, and short leverage is at the 99th percentile versus the last five years.
The pivot came after the AI trade cracked. A hotter US inflation reading, coupled with fresh skepticism about the payoff from heavy AI capacity outlays, triggered a selloff in semiconductor and infrastructure shares and prolonged the decline that had started with Asian memory stocks. Last week, the Nasdaq 100 dropped 5.5% - the steepest weekly loss since April 2025 - and the index's futures were nearly 2% lower on Thursday.
Performance pressure helps explain the shift. Goldman's team led by Vincent Lin wrote that global fundamental long/short funds were off 2.5% for October through Monday, leaving year-to-date gains at 10.1%. Among sectors, technology, media and telecommunications funds have been the weakest performers, with a 7.4% decline month to date.
Goldman's summary even used the phrase "short squeeze risk alert?" - question mark included - to signal the setup but also the uncertainty. A packed short book can fuel a squeeze, but it does not create the spark, and these shorts were added as tech sold off for clear fundamental reasons. On its own, positioning data does not suggest the backdrop has shifted.
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Selling in global information technology shares was intense: in the two weeks through Oct. 16, the desk logged the largest net outflows in its dataset in over ten years. Net allocation to Goldman's global AI basket sits at the 38th percentile for the past year, while the group's long to short ratio is down at the sixth percentile. Any upward catalyst in tech would meet a wall of shorts that must be bought back.
Regionally, Europe stands out as the only major market with small net purchases so far this month. Meanwhile, net exposure to the Magnificent 7 reached a record peak, while the broader tech complex was simultaneously being reduced. Big picture, hedge funds look hedged rather than absent - short exposure is high, net exposure is low, and tech remains central to their books.
In plain English: positioning is defensive, not deserted. If tech stabilizes or rebounds, the crowded short side could amplify the move up. If the AI unwind continues, funds already have shorts on and low net exposure to absorb more pressure. Either way, the setup tilts toward larger swings in tech and indices that rely on it, which can ripple through growth-heavy portfolios.
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