Hedge Funds Again Shorting Risky Tech After Rally Forced Unwind

Professional speculators aren’t convinced that the worst is over for one risky corner of the stock market despite a rousing new-year rally.

Hedge funds that make both bullish and bearish equity wagers have returned to betting against unprofitable technology shares this month after being forced to unwind some positions earlier. Thanks to the increase in shorts, their overall exposure to these companies fell to near the lowest level since 2018, data compiled by Morgan Stanley’s prime brokerage show.

“The short covering has been isolated to a few trading days, but we haven’t seen the widespread reduction in crowded short exposure that one might expect given how sharply the high-short interest names rallied,” Morgan Stanley’s team including Bill Meany wrote in a note to clients this week. Hedge funds “are still running high levels of short leverage despite their efforts to cover shorts.”

The move reflects a broadly cautious stance among big money managers despite an equity bounce that has defied gloomy warnings. As stocks recovered into the new year, countering strategist calls for a first-half selloff, hedge funds tracked by Morgan Stanley have trimmed short positions on the index level to capture the upside. Yet for individual stocks, their short exposure stayed elevated and, even on the long side, it’s defensive and large-cap shares that were favored.