Hedge funds are doubling down on their bearish outlook, pushing short-selling activity to unprecedented levels and driving gross leverage to record highs, according to the latest data from Goldman Sachs and industry insights.
This aggressive shift, particularly targeting financial and biotechnology sectors, signals growing caution among professional investors amid a volatile economic landscape shaped by trade tensions, geopolitical uncertainty, and shifting market dynamics.
A Surge in Short-Selling Activity
Goldman Sachs’ Hedge Fund Trend Monitor, released on May 20, 2025, reveals a significant uptick in short positions, with hedge funds increasing their bearish bets by $25 billion over the past three Commitments of Traders (COT) reports—the largest such increase in a decade.
Short interest now accounts for 41% of total open interest, a level not seen since February 2021, per Trade Algo.
The median short interest in S&P 500 companies has climbed to 2.3% of market float, surpassing the long-term historical average of 1.8% for the first time since 2021, underscoring a deepening pessimism among fund managers.
This wave of short-selling is particularly pronounced in exchange-traded funds (ETFs) and individual stocks within the financial and biotech sectors.
Goldman Sachs notes that financial stocks, already under pressure from high interest rates and regional banking concerns, are facing the brunt of this bearish sentiment.
Similarly, biotechnology firms, grappling with regulatory hurdles and uneven earnings, have become prime targets for short sellers seeking to capitalize on potential downturns.
Companies like NWBO and QNTM stick out in particular, retail investor favorites targeted by short sellers.
Record Leverage Fuels Risky Bets
The surge in short positions has propelled gross leverage—borrowed capital used to amplify investment returns—to an all-time high.
According to Goldman Sachs, hedge fund leverage in equity positions has reached nearly three times their capital, a significant jump from 2.35 times a year ago.
This escalation reflects a strategic shift among hedge funds to magnify returns through borrowed funds, a tactic that heightens both potential gains and risks in an already turbulent market.
“Hedge funds are not just betting against the market; they’re leveraging up to make those bets count,” said Sarah Thompson, a senior analyst at TradeAlgo.
“The combination of high leverage and concentrated shorting in vulnerable sectors like financials and biotech suggests funds are bracing for significant market corrections.”
The aggressive use of leverage comes as funds navigate a complex economic environment.
The S&P 500 has faced volatility following President Donald Trump’s announcement of sweeping tariffs in April 2025, which sparked fears of a global trade war and a potential recession.
The index plunged over 10% in the days following the tariff announcement, marking its worst two-day performance since the 2020 pandemic.
Hedge funds, anticipating further declines, have ramped up short positions to hedge against or profit from market downturns.
Strategic Long Positions Balance the Equation
Despite the bearish tilt, hedge funds have not abandoned bullish strategies entirely, per reports.
Goldman Sachs’ VIP List, a proprietary basket of the most popular long positions, has returned 6% year-to-date in 2025, outpacing the broader S&P 500.
High-liquidity tech giants like Amazon, Meta Platforms, Alphabet, Microsoft, and Nvidia dominate these long positions, reflecting funds’ preference for liquid, high-volume stocks that allow rapid entry and exit.
This selective stock-picking has enabled long/short equity hedge funds to maintain positive performance, posting an average year-to-date return of 1% despite heightened volatility.
“The success of these funds lies in their ability to balance aggressive shorting with well-chosen long positions in sectors like technology, which continue to show resilience,” said Michael Carter, a hedge fund strategist at Morgan Stanley.
Hedge Funds Are in “Protection Mode”
The resurgence of short-selling coincides with a period of intense market uncertainty, much of it triggered by what analysts have dubbed “Liberation Day”—the day after President Trump’s tariff announcement on April 3, 2025.
The policy, which could raise U.S. tariff rates from 2.5% to over 20%, has raised concerns about inflation, supply chain disruptions, and economic slowdown.
China’s retaliatory 34% tariffs on U.S. imports further escalated tensions, contributing to a 6% drop in the FTSE and a four-year low in oil prices.
“Hedge funds are in self-protection mode,” said Tony Pasquariello, head of hedge fund client coverage at Goldman Sachs.
“The tariff shock caught even the most hawkish managers off guard, prompting a rapid increase in short positions to hedge against further downside.”
Morgan Stanley reported that net leverage among U.S. long-short funds dropped to 37% by the end of April, near historical lows, as funds unwound positions to mitigate risk.
Risks and Rewards of High Leverage
While high leverage can amplify returns, it also magnifies losses, making hedge funds’ current strategy a high-stakes gamble.
The record short positions in U.S. Treasuries futures, noted in late 2023, serve as a cautionary tale.
Funds that piled into the “basis trade” faced significant losses when yields unexpectedly plunged, forcing rapid position unwinding.
Similarly, the 2021 GameStop short squeeze demonstrated the perils of aggressive shorting when retail investors, coordinated via platforms like Reddit’s r/wallstreetbets, drove stock prices to astronomical levels, costing short sellers billions.
“Shorting is hot again, but it’s a double-edged sword,” warned Emily Chen, a financial markets commentator at Reuters.
“If the market rebounds or retail investors target heavily shorted stocks, hedge funds could face substantial losses.”
Also Read: Expert Predicts Massive Panic Will Trigger Short Squeeze Across the Market
Looking Ahead: A Polarized Market
As hedge funds continue to short the market at a record pace, their actions reflect a polarized outlook: cautious optimism in tech-driven growth sectors and deep skepticism about broader market stability.
The interplay of high leverage, concentrated shorting, and selective long positions underscores the complexity of today’s financial landscape.
Investors and analysts alike are watching closely to see whether these bearish bets will pay off or if an unexpected market rally could upend the strategy.
For now, hedge funds are riding a wave of leverage and short-selling, betting big against a market they see as increasingly precarious.
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