Hedge funds increase short bets as momentum trade falters
Hedge funds are increasing short positions and shifting towards fundamental stock selection as the technology-led momentum trade loses steam, forcing managers to identify individual winners and losers rather than rely on broad market gains, according to a report by Business Insider. An October report from Goldman Sachs' prime brokerage division found that hedge fund short positioning was…
Hedge funds are ramping up short positions and moving towards focusing on individual company analysis as the once successful momentum trading strategy loses its momentum, according to a Business Insider report. A Goldman Sachs prime brokerage analysis reveals that short positions among hedge funds are nearing a five-year peak, indicating a growing appetite for safeguarding against potential declines in a volatile market.
Angela Aldrich, the founder of Bayberry Capital, is reportedly planning to launch a specialized short-only strategy in addition to the firm's traditional long-short equity fund, underscoring the renewed emphasis on pinpointing overvalued companies. Other fund managers are now concentrating on opportunities specific to individual companies instead of pursuing broader market trends.
Maverick Capital's co-chief investment officer, David Tykocinski, recently presented a bullish outlook on Intel, emphasizing the company's semiconductor manufacturing prowess rather than the anticipated growth of the AI sector. This shift comes in the wake of a significant downturn in momentum strategies, which enjoyed significant returns throughout 2025 and the first half of 2026 due to the surge in technology and AI-related stocks.
However, these strategies have since suffered a substantial drop of over 7% since July, as rising interest rates and doubts about AI valuations negatively impacted previously robust performers. The evolving market environment is putting additional strain on hedge funds to prove their capacity to generate returns independently of market direction.
JPMorgan's John Schlegel highlighted that hedge funds have historically performed better in market declines compared to when overall portfolio returns remain negative. As momentum trades lose their effectiveness and the disparities in performance widen, managers are increasingly turning to fundamental research, short selling, and unique investment approaches to preserve capital and generate returns.
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