Hedge Fund Shorts Near 5-Year High, Goldman Warns of Tech Short-Squeeze Risk

Hedge funds have sharply increased short positions this month, pushing bearish bets to near five-year highs and raising the risk of a violent short squeeze if markets rebound, Goldman Sachs said. Short sales now outnumber long buys roughly 5:1 in global equities, with gross short leverage at the 99th percentile of the past five years, according to Goldman's prime brokerage data. Even as gross leverage rose, net leverage at fundamental long-short funds fell to a near three-year low. The retreat follows a sharp pullback in the AI trade. Higher-than-expected U.S. inflation and doubts over returns on massive AI capital spending triggered a selloff in semiconductor and infrastructure stocks, extending a decline that began in Asian memory names. The Nasdaq 100 fell 5.5% last week, its worst weekly drop since April 2025, and global IT stocks saw their heaviest net selling in over a decade in the two weeks through October 16. Goldman's Vincent Lin-led team said global fundamental long-short funds fell 2.5% in October through Monday, trimming year-to-date gains to 10.1%, with tech, media and telecom funds down 7.4%. The team flagged "short-squeeze risk" with a question mark, noting crowded shorts lack a catalyst and were built against tech names with clear fundamental drivers. Europe was the only major region with slight net buying this month, while net exposure to the Magnificent Seven hit a record high.