Hedge funds made $24 billion shorting software stocks by 2026 – and they’re increasing their bets

Hedge funds have increased their short interest in software stocks, contributing to the sector’s steep decline so far this year, according to people at two of Wall Street’s largest funds.

Short sellers have made a $24 billion windfall on software stocks so far this year, while the industry’s overall market value has declined by $1 trillion, according to data from S3 Partners.

Hedge fund officials would not comment on the specific names of companies seeing an increase in large short bets, but said the focus appears to be on companies that provide basic automated services to clients that can be easily replicated with new AI tools.

Just as hedge funds may flock to momentum trades to the upside, investors like to increase their short bets by finding falling knives to the downside where they see indiscriminate selling. The software space is currently offering just that. iShares Expand Technology Software ETF (IGV) It fell 8% this week, taking its loss for the year to more than 21%.

The ETF has fallen 30% since its all-time high in September of last year.

“Hedge funds are all net short software right now,” said Gil Luria, an analyst at DA Davidson.

Software investors increasingly believe the industry may be undergoing a “tectonic shift” that could lead to increased deal activity, including acquisitions by larger companies.

Short sellers borrow stocks from brokers, sell them, buy them back later at a lower price, and make a profit on the difference.

stocks such as terra wolf and Asana According to S3 Partners data, ETF investors are currently making the largest short bets on them. In the case of TeraWulf, more than 35% of the shares currently available for trading are sold short. This number equates to 25% of Asana. drop box and crypto mining The companies are shorting 19% and 17% of their float, respectively, according to S3.

Some of the worst-performing stocks in the IGV ETF so far this year include: intuitionmanufacturers of tax preparation software, and docusignprocesses PDFs and other documents, both of which have decreased by more than 30%.

Some of the leading ETF stocks have also been hit hard this year. microsoft and oracle They decreased by 15% and 21%, respectively. sales force, adobe and ServiceNow Both have fallen more than 20%.

On the positive side, one banking source said, there is not yet much panic on the credit front in the sector as revolving credit lines have not yet been drawn.

Some analysts said public market sentiment could change quickly, with several software companies scheduled to report earnings within the next few days.