Hedge funds aggressively ramped up equity short positions this month, pushing bearish bets to a near five-year high and intensifying the risk of a violent short squeeze should the market rebound.
According to data from the prime brokerage division of Goldman Sachs Group Inc, the ratio of short selling to long buying across global equities stands at roughly five to one. Short leverage on its books is at the 99th percentile of the past five years. Even as gross leverage has risen, the net leverage of fundamental long-short funds—a measure of how much long exposure exceeds short exposure—has fallen close to a three-year low.
This retreat followed a sharp unwind of the AI trade. Stronger-than-expected US inflation data, combined with renewed doubts over whether massive AI computing investments will deliver returns, triggered a selloff in semiconductor and infrastructure stocks and extended a decline that began with Asian memory chip shares. The Nasdaq 100 fell 5.5% last week, its largest weekly drop since April 2025, while futures on the benchmark index fell nearly 2% on Thursday.
The unwind appears costly. A Goldman Sachs Group Inc team led by Vincent Lin wrote in a report this week that global fundamental long-short funds had lost 2.5% in October through Monday, paring their year-to-date gain to 10.1%. Funds focused on technology, media and telecommunications performed worst, down 7.4% month-to-date.
The division issued the phrase "short squeeze risk alert" in its data summary, appending a question mark to reflect uncertainty. Crowded short positions can create conditions for a squeeze but do not necessarily provide a catalyst; moreover, these shorts were established during a tech selloff with identifiable fundamental drivers. Position data alone makes it difficult to see that the market backdrop has changed.
In the two weeks through October 16, global information technology stocks recorded their largest two-week net selling in more than a decade of the division's records. The net allocation to a Goldman Sachs Group Inc basket of global AI stocks sits at the 38th percentile of the past year, while the long-short ratio for the sector is at the 6th percentile. Consequently, any catalyst that lifts tech stocks from current levels will run headlong into short positions that need to be covered.
Europe is the only major region to record modest net buying month-to-date, and even as the broader tech sector sold off, net exposure to the "Magnificent Seven" stocks still climbed to a record high. The data suggests hedge funds are "hedging against risk" rather than "liquidating and exiting." Short exposure is elevated, net exposure is low, and tech stocks remain at the core of positioning.
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