Hedge funds are sharply increasing their bearish bets against US small-cap stocks following a strong rebound in the sector, as mounting economic uncertainty and higher-for-longer interest rates weigh on sentiment, according to a report by Bloomberg.

The report cited data from Goldman Sachs as showing that short interest in the Russell 2000 Index surged to $16bn in July, one of the highest levels since 2021. Simultaneously, hedge funds’ net exposure to Russell 2000 futures has fallen near one-year lows – even as positioning in Nasdaq 100 futures nears record highs – highlighting the growing divergence in investor confidence between large- and small-cap stocks.

Despite rallying 26% from April lows, small-cap stocks remain under scrutiny due to their weaker balance sheets and heavier reliance on external financing – factors that leave them more vulnerable to rising interest rates, inflation, and a slowing economy.

The scepticism comes as US President Donald Trump intensifies his trade war agenda, raising concerns about broader macro headwinds. While small caps initially benefited from the so-called Trump trade, predicated on re-shoring and domestic demand, those gains are now being challenged by persistent inflation and tightening financial conditions.