Hedge funds have increased bearish equity positions to near five-year highs, raising the risk of a sharp short squeeze if markets rebound, according to a report by Bloomberg citing Goldman Sachs prime brokerage data.

Short selling has outpaced long buying across global equities by approximately five to one this month, with short leverage reaching the 99th percentile of its five-year range. Net leverage among fundamental long-short funds has fallen to near a three-year low, despite an increase in gross leverage.

The defensive positioning follows a sharp reversal in artificial intelligence-related stocks, driven by stronger-than-expected US inflation data and mounting concerns over returns on AI infrastructure spending. The Nasdaq 100 fell 5.5% last week, its steepest weekly decline since April 2025.

Global fundamental long-short funds were down 2.5% in October as of Monday, reducing year-to-date gains to 10.1%, according to Goldman. Technology, media and telecommunications-focused managers have suffered the heaviest losses, declining 7.4% month-to-date.

The selling has been particularly concentrated in technology, with global information technology stocks recording their largest two-week net selling since Goldman began tracking the data more than a decade ago, in the period to 16 October.

Net allocation to Goldman's global AI stock basket has fallen to the 38th percentile of its one-year range, while the long-short ratio has dropped to the sixth percentile, leaving managers heavily positioned against a potential technology rebound.

Europe has been the only major region to record modest net buying this month, while net exposure to the Magnificent Seven technology stocks has reached a record high despite broader selling across the sector.

Goldman flagged the possibility of a short squeeze as crowded bearish positioning leaves funds vulnerable to a sudden recovery in equity prices, although persistent inflation concerns and uncertainty over AI investment returns continue to weigh on sentiment.