One Week After the Short Squeeze, Hedge Funds Ramp Up Short Positions Again
Alina Collins
Just one week after the largest short squeeze since November 2020, hedge funds have flipped back to net selling, with short sales once again exceeding long buys. This means → the rally's fuel is spent, and the market enters a fresh tug-of-war between bulls and bears.
Why did the squeeze unwind so fast?
Goldman Sachs Prime Brokerage data shows U.S. long-short fund gross leverage fell 3.9 percentage points to 204.2%, sitting at the 6th percentile over the past year. This means → overall risk exposure is back near rock bottom; the forced buying from the squeeze has already been unwound.
Net leverage edged up just 0.8 pp to 53.6%, at the 60th percentile — funds tweaked direction slightly but did not pile into longs.
In plain terms = the squeeze was a flash fire. Once it burned out, funds' first move was not to buy the dip — it was to cut exposure to a safety zone.
What drove last week's rally — and who won, who lost?
The catalyst was a much-weaker-than-expected nonfarm payrolls report. The probability of a September rate hike plunged from near-certain to roughly 40%, and markets responded with "bad news is good news" logic, pushing the S&P 500 to its 26th all-time high of the year.
Software and internet earnings impressed: Atlassian surged 30% in a single week; Twilio jumped 25%, forcing some shorts to cover.
Yet popular semiconductor longs came under pressure — Micron and AMD slipped. This reflects rapid sector rotation, not a broad bullish turn.
Where are hedge funds concentrating their short bets?
The main driver of last week's net selling was macro products — index and ETF shorts combined — at a short-to-long ratio of 2.2-to-1, with net selling at -0.6 standard deviations versus the past year.
In plain terms = funds are not picking individual stocks to short. They are using index and ETF instruments to bet against the market's overall direction.
U.S.-listed ETF short interest fell for a fifth straight week, down 12% month-over-month, led by short covering in credit and large-cap ETFs. But new shorts in small-cap ETFs partially offset that covering — a sign funds are least confident in small caps.
Which sectors are being bought, which sold?
Financials saw net buying for a fourth straight week, with a buy-to-sell ratio of 3.8-to-1 and net buying intensity at +1.0 standard deviations. Within the sector, transaction & payment processing and capital markets led inflows; banks and insurance were net sold.
This means → hedge funds are not bullish on traditional banks — they favor fintech and capital-markets businesses. Their overweight in financial services is at a three-year high.
Energy flipped to a small net sell after seven consecutive weeks of net buying, with a short-to-long ratio of roughly 4-to-1. Yet the overall position remains tilted long — net exposure is 4.0% of total U.S. net market value, and the long-short ratio of 1.87 sits at the 95th–100th percentile over one and three years.
What matters this week?
A packed macro calendar: Wednesday's July CPI (consensus: core CPI +0.2% m/m, +2.5% y/y), Thursday's PPI, and Friday's retail sales.
This means → these three data points will directly test whether the current short positioning can hold. If inflation comes in below expectations, rate-cut bets rise and shorts risk another squeeze. If data runs hot, the bearish thesis gets validated.
Put simply = hedge funds just re-loaded their short bets. This week's data is the referee — get the direction right and they profit big; get it wrong and they face another squeeze.
Content is for reference only, not financial advice.