Hedge fund short bets near five-year highs as Goldman warns of squeeze risk
Hedge funds have increased bearish equity positions to near five-year highs, raising the risk of a sharp short squeeze if markets rebound, according to a report by Bloomberg citing Goldman Sachs prime brokerage data. Short selling has outpaced long buying across global equities by approximately five to one this month, with short leverage reaching the 99th percentile of its five-year range. Net…
Recent reports from Goldman Sachs indicate that hedge funds have reached near five-year peak levels of bearish equity positions, potentially leading to a sharp short squeeze if markets make a swift rebound. In October, short selling outpaced long buying by approximately five to one for global equities, with short leverage peaking at the 99th percentile of its five-year range.
However, net leverage among fundamental long-short funds has dropped to near a three-year low. The decline in net leverage comes after a sharp reversal in AI-related stocks, triggered by stronger-than-expected US inflation data and heightened apprehension regarding returns on AI infrastructure investments. The Nasdaq 100 experienced its steepest weekly decline in five months, falling 5.5% last week.
In October, global fundamental long-short funds saw a 2.5% drop, reducing year-to-date gains to 10.1%. Technology, media, and telecommunications managers have borne the brunt of the losses, with these funds declining 7.4% month-to-date. The selling has been most intense within the technology sector, with global IT stocks posting their largest two-week net selling in over a decade, according to Goldman.
The strategy has been particularly concentrated in technology, with global IT stocks witnessing their most substantial two-week net selling in over a decade. Net allocation to Goldman's global AI stock basket has fallen to the 38th percentile of its one-year range, while the long-short ratio has sunk to the sixth percentile, positioning managers against a potential technology recovery.
Europe has been the sole region to exhibit modest net buying, while net exposure to the Magnificent Seven technology stocks has hit a record high despite broader selling across the sector. Goldman warned of a potential short squeeze as crowded bearish positioning leaves funds exposed to a sudden equity price recovery, despite ongoing inflation concerns and uncertainty about AI investment returns.
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