Hedge funds significantly increased their short positions in equities this month, pushing bearish wagers to near their highest level in five years. If the market rebounds, the risk of a violent short squeeze rises accordingly.
The prime brokerage division of Goldman Sachs Group stated that the ratio of short selling to long buying was approximately 5 to 1. The short leverage level in its client books stands at the 99th percentile of the past five years. Meanwhile, the net leverage of fundamental long-short equity funds (the metric measuring the extent to which long exposure exceeds short exposure) has fallen to near a three-year low, even as gross leverage has risen. This comes after a massive unwind of the AI trade. U.S. inflation data came in above expectations, and the market once again questioned whether massive AI capacity investments can deliver corresponding returns, triggering a selloff in semiconductor and infrastructure stocks, extending an earlier decline that began with Asian memory chip shares. The Nasdaq 100 fell 5.5% last week, its largest weekly drop since April 2025; on Thursday, index futures fell nearly another 2%. This round of unwinding appears to have come at a considerable cost to funds. The Goldman Sachs team led by Vincent Lin wrote in a report this week that as of Monday, global fundamental long-short funds had fallen 2.5% in October, narrowing their year-to-date gains to 10.1%. Among them, funds focused on the technology, media, and telecommunications sectors performed the worst, dropping 7.4% month-to-date. The Goldman Sachs prime brokerage division raised the phrase "Short squeeze risk alert?" in its data summary, with the question mark reflecting the remaining uncertainty. Crowded short positioning can create conditions for a short squeeze but is not itself a trigger; moreover, these short positions were established amid a selloff in tech stocks driven by clear fundamental factors. Based solely on positioning data, it is nearly impossible to discern that the market backdrop has already changed. In the two weeks through October 16, global information technology stocks experienced the largest two-week net selling in more than a decade of the Goldman Sachs division's records. Net allocation to a Goldman Sachs basket of global AI stocks stands at the 38th percentile of the past year, while the long-short ratio for that basket is at the 6th percentile. Therefore, if any catalyst emerges to drive tech stocks higher, it could force shorts to cover. Europe is the only major region to see slight net buying month-to-date. Meanwhile, despite the broad selloff in tech stocks, net exposure to the Magnificent Seven rose to a record high. These data suggest that hedge funds are currently more focused on increasing hedges rather than a full-scale retreat from the market. Short exposure is elevated, net exposure is low, and tech stocks remain at the core of their positioning.
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