Global hedge funds have reduced their exposure to US software stocks to "new multi-year lows" following a broader sell-off in the technology sector, according to a report by Reuters citing a recent note from Morgan Stanley's prime brokerage division.

The bank reported that software stocks were the most heavily sold, continuing a trend of net selling that began in late April, driving hedge fund exposures to these stocks to unprecedented lows in recent years.

The recent rally in tech stocks, led by a select few mega-cap companies, has sparked concerns among investors that these gains could quickly reverse if market sentiment shifts.

Morgan Stanley, which monitors hedge fund flows through its prime brokerage unit, noted that portfolio managers were net sellers of equities across the US, Europe, and Asia (excluding Japan) last week. This trend persisted despite volatility on Thursday, when data revealed that US consumer prices fell in June for the first time in four years, its hedge funds continuing to net sell equities every day during the week ending 11 June.

The S&P North American Technology Software Index declined by approximately 2% last week but remains up 8.8% for the year. The index includes major companies like Adobe, Salesforce, Microsoft and Oracle.

Beyond the technology, media and telecommunications sectors, hedge funds also reduced their holdings in cyclical stocks, which tend to fluctuate with the economic cycle.