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What is the story about?
Hedge funds are ramping up short positions in software stocks, adding to the sharp selloff in the sector so far this year, two major Wall Street fund sources have told CNBC.
Short sellers have generated $24 billion in profits from software stocks this year, even as the sector’s total market capitalisation has shrunk by about $1 trillion, according to S3 Partners data.
While the hedge fund sources declined to name specific companies where short exposure has increased, they said investors are largely targeting firms that offer basic automation services, businesses viewed to be vulnerable to disruption from newer AI tools.
Just as hedge funds tend to rush to upside momentum trades, they also look for the “falling knives” on the downside, where indiscriminate selling allows them to build larger short positions. The software sector has become a prime target, with the iShares Expanded Tech-Software ETF down 8% this week, extending its losses this year to over 21%.
The ETF has fallen around 30% from its all-time high achieved in September last year.
Gil Luria, analyst at DA Davidson, said, “Hedge funds are all net short software right now.”
More and more investors now believe that the software industry might be undergoing a broader structural shift, a view that could spur increased deal activity, including takeovers by larger players.
Data from S3 Partners shows that some of the biggest short positions within the ETF are concentrated in stocks such as TeraWulf and Asana. More than 35% of TeraWulf’s freely traded shares are currently sold short, while the figure for Asana is about 25%. Dropbox and Cipher Mining also carry elevated short interest, with 19% and 17% of their respective floats sold short.
Several widely held software names have been among the worst performers in the 'IGV' ETF this year, including Intuit and DocuSign - both down more than 30%. Larger constituents have also come under pressure, with Microsoft and Oracle down 15% and 21%, respectively, while Salesforce, Adobe and ServiceNow have each fallen more than 20%.
Despite the steep equity selloff, one banker said that so far, there is little sign of stress in credit markets, noting that revolving credit lines across the sector have not yet been widely drawn.
Some analysts said sentiment could shift in the near term, with several software companies scheduled to report earnings in the coming days.
Short sellers have generated $24 billion in profits from software stocks this year, even as the sector’s total market capitalisation has shrunk by about $1 trillion, according to S3 Partners data.
While the hedge fund sources declined to name specific companies where short exposure has increased, they said investors are largely targeting firms that offer basic automation services, businesses viewed to be vulnerable to disruption from newer AI tools.
Just as hedge funds tend to rush to upside momentum trades, they also look for the “falling knives” on the downside, where indiscriminate selling allows them to build larger short positions. The software sector has become a prime target, with the iShares Expanded Tech-Software ETF down 8% this week, extending its losses this year to over 21%.
The ETF has fallen around 30% from its all-time high achieved in September last year.
Gil Luria, analyst at DA Davidson, said, “Hedge funds are all net short software right now.”
More and more investors now believe that the software industry might be undergoing a broader structural shift, a view that could spur increased deal activity, including takeovers by larger players.
Data from S3 Partners shows that some of the biggest short positions within the ETF are concentrated in stocks such as TeraWulf and Asana. More than 35% of TeraWulf’s freely traded shares are currently sold short, while the figure for Asana is about 25%. Dropbox and Cipher Mining also carry elevated short interest, with 19% and 17% of their respective floats sold short.
Several widely held software names have been among the worst performers in the 'IGV' ETF this year, including Intuit and DocuSign - both down more than 30%. Larger constituents have also come under pressure, with Microsoft and Oracle down 15% and 21%, respectively, while Salesforce, Adobe and ServiceNow have each fallen more than 20%.
Despite the steep equity selloff, one banker said that so far, there is little sign of stress in credit markets, noting that revolving credit lines across the sector have not yet been widely drawn.
Some analysts said sentiment could shift in the near term, with several software companies scheduled to report earnings in the coming days.
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