Hedge funds are increasing short positions and shifting towards fundamental stock selection as the technology-led momentum trade loses steam, forcing managers to identify individual winners and losers rather than rely on broad market gains, according to a report by Business Insider.
An October report from Goldman Sachs' prime brokerage division found that hedge fund short positioning was approaching a five-year high, reflecting growing demand for downside protection amid heightened market volatility. Bayberry Capital founder Angela Aldrich is reportedly launching a dedicated short-only strategy alongside the firm's existing long-short equity fund, highlighting the renewed focus on identifying overvalued companies.
Other managers are concentrating on company-specific opportunities rather than broader macroeconomic themes. Maverick Capital co-chief investment officer David Tykocinski recently outlined a bullish investment case for Intel, based on its semiconductor manufacturing capabilities rather than expectations for the wider AI sector.
The shift follows a sharp reversal in momentum strategies, which generated substantial gains throughout 2025 and the first half of 2026 as technology and AI-related stocks rallied. BlackRock's momentum ETF gained more than 55% from the beginning of 2025 through the second quarter of 2026, but has declined more than 7% since July as rising interest rates and concerns over AI valuations weighed on previously strong performers.
The changing environment is increasing pressure on hedge funds to demonstrate their ability to generate alpha independently of market direction. John Schlegel, JPMorgan's head of positioning intelligence, noted that hedge funds have historically generated stronger alpha during market downturns, even when overall portfolio returns remain negative.
With momentum trades losing their effectiveness and performance dispersion widening, managers are increasingly relying on fundamental research, short selling and differentiated investment strategies to protect capital and deliver returns.
