Hedge funds last week abandoned tech stocks at the fastest pace in six months and at the highest levels in five years, as global markets reacted to concerns over U.S. President Donald Trump's April 2 deadline for import tariffs and potential retaliation from trade partners. There are growing worries that U.S. government cutbacks under Trump could push the economy toward recession.
According to Goldman Sachs, hedge funds reduced long positions and exited bets against tech stocks, marking a significant shift in strategy. The information technology sector, which includes the so-called Magnificent Seven tech stocks, was the most heavily sold on the Prime book, reflecting notable activity from the bank's prime brokerage desk.
Analysts at Edmond de Rothschild linked the decline in tech stocks to the anticipated copper tariffs set to take effect on April 2. A Morgan Stanley report indicated that hedge funds are increasingly placing short bets on stocks, with Nvidia, Advanced Micro Devices, and Tesla being the three most shorted stocks.
Goldman noted that U.S. tech stocks constituted about 75% of the selling last week, particularly among companies producing AI-related tech hardware. Hedge fund exposure to this sector has now reached a five-year low. Notably, despite having purchased tech stocks in mid-March, hedge funds quickly sold them off the following week. Furthermore, strong retail buying may have influenced hedge fund positions.
A short squeeze can occur when stock prices rise significantly, rendering bearish bets too costly to maintain, forcing investors to buy them back, sometimes at a loss. The JPMorgan report observed that hedge fund flows and positioning suggest they may already be somewhat prepared for the impending tariff news, particularly regarding key areas of focus.