Hedge Funds Shift to Index-Level Shorts as Tech Correlation Rises, Threatening Market Volatility

Hedge funds are rotating away from single-stock shorts toward index-based hedges such as QQQ, a structural shift that risks worsening market volatility after tech stocks fell about 8% in October, Bloomberg macro strategist Simon White said. Short interest in QQQ has jumped over the past two weeks while net short positioning in SPY remains low, according to Goldman Sachs data. Goldman data also showed hedge fund short positions in U.S. macro products, including index futures and ETFs, reached a 10-year high as of May. White said low correlation between individual stocks had suppressed the VIX even as tech companies increased debt to fund AI capital spending, but rising index-level hedging is now pushing stock correlations higher. SEC Form PF data through the second quarter show equity long-short funds' gross exposure has grown by more than $5 trillion since 2024 to above $8 trillion, while net exposure rose only about $1 trillion to $2 trillion. The gap reflects funds using more shorts to control net risk while maintaining large long portfolios. White warned that the prior low-correlation "anti-leverage" buffer is fading, and a new shock could spread losses from tech across the broader market.