Already made $24 billion this year! Hedge funds aggressively short software stocks

# Source: Wall Street Insights

By Dong Jing

Data shows the software industry has lost $1 trillion in market capitalization year to date. Short sellers are zeroing in on companies offering basic automation services that are vulnerable to replacement by AI tools. Tech giants including Microsoft and Oracle have seen their shares drop over 15%, while mid and small-cap software stocks have plummeted more than 30%. Short sellers have made a rare strategic shift—instead of covering their positions, they are ramping up short bets. Institutional analysts note that nearly all hedge funds are now net short on the software sector.

Year to date, Wall Street hedge funds have raked in $24 billion in profits by heavily shorting software stocks, driven primarily by growing market fears that advances in AI technology will upend traditional software business models and deal a severe blow to the industry.

The sell-off is now accelerating. According to S3 Partners data cited by Bloomberg on February 4, the software industry’s overall market cap has eroded by $1 trillion so far this year amid a fierce offensive by short sellers. Sources at major Wall Street hedge funds revealed that investors are focusing their short positions on firms that provide basic automation services—businesses easily replicable and replaceable by new AI tools.

Meanwhile, short sellers are not backing off as stock prices fall; instead, they are viewing the slump as an opportunity to "catch a falling knife" and increasing their short wagers. Gil Luria, an analyst at DA Davidson, pointed out that nearly all hedge funds are currently net short on the software sector.

The plunge in software stocks has triggered widespread market volatility. The iShares U.S. Technology Software ETF has dropped 8% this week, with a year-to-date decline of over 21% and a 30% fall from its all-time high hit last September. Microsoft and Oracle are down 15% and 25% respectively in 2026, while Salesforce, Adobe and ServiceNow have all tumbled more than 20%.

## Short Sellers Reap Windfall Profits, Targeting "Easily Replaceable" Stocks

S3 Partners data shows short sellers have booked $24 billion in mark-to-market profits on software stocks year to date. This short-selling wave is not random; it is highly targeted.

Bloomberg reported, citing sources at two major hedge funds, that the current focus is on companies whose business models are susceptible to disruption by emerging AI tools, particularly those offering basic automation services.

As fears over AI’s disruptive potential mount, investors are increasingly viewing the software industry as undergoing a "structural shift". This expectation of transformation has led to indiscriminate selling of software stocks, which hedge funds are seizing as an opportunity to short the sector further.

Among ETF holdings, the stocks with the highest short interest ratios show a clear concentration. Over 35% of TeraWulf’s floating shares are sold short, with the ratio standing at 25% for Asana. Additionally, the short interest ratios for Dropbox and Cipher Mining’s floating shares have reached 19% and 17% respectively.

## Giants Not Spared, a Rare Shift in Short-Selling Strategy

Notably, the sell-off is not limited to mid and small-cap software firms; industry giants are also facing significant downward pressure.

In addition to sector heavyweights such as Microsoft, Oracle, Salesforce and Adobe, even niche leaders like tax software maker Intuit and document processing giant DocuSign have seen their shares drop more than 30% year to date.

More crucially, short sellers have made a rare strategic pivot. S3 Partners noted that short sellers are increasing their bets on large tech stocks including Microsoft, Oracle, Broadcom and Amazon—a stark contrast to the traditional practice of covering short positions during a market decline.

Leon Gross highlighted Microsoft as a notable example. Historically, Microsoft has typically acted as a "reversal stock", with short sellers tending to buy back shares to cover positions as its price falls. Now, however, it is trading more like a "momentum-driven underperformer", with short sellers doubling down on their short bets as its stock weakens.

Data shows that short positions on Microsoft have surged 20% year to date, while those on Oracle have risen 10%.

## Credit Markets Remain Stable for Now, Market Awaits Earnings Guidance

Despite the heavy losses in the stock market, there are no signs of panic in the credit market at present.

A banker told CNBC that revolving credit facilities in the sector have not been tapped, indicating that corporate balance sheets still hold a degree of resilience.

Some analysts believe that as several software companies are set to release their earnings reports in the coming days, sentiment in the public markets may be on the cusp of a turning point.

At the same time, investors in the sector generally believe that the current structural pressures are likely to spur more trading activity, including mergers and acquisitions initiated by large companies—an event that may bring new variables to the battered software sector.

### Risk Warning and Disclaimer

The market is risky, and investment requires prudence. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial conditions or needs of individual users. Users should assess whether any opinions, views or conclusions in this article are consistent with their specific circumstances. Any investment made based on this article shall be at the investor's own risk.