Hedge funds are stepping up short positions in listed software companies after generating an estimated $24bn in profits from bearish bets so far in 2026, according to a report by CNBC citing data from S3 Partners and sources at major Wall Street funds.
The gains come amid a sharp sell-off across the software sector, which has seen around $1tn wiped off its market capitalisation since the start of the year. Hedge fund managers say positioning remains skewed further to the downside, with many funds now net short software equities.
The iShares Expanded Tech-Software ETF (IGV) has fallen more than 21% year-to-date, including an 8% drop this week alone, and is now roughly 30% below its September 2025 peak.
Sources said short sellers are increasingly targeting companies offering basic automation or workflow software, where revenues are seen as vulnerable to disruption from generative AI tools. Managers are focusing on names caught in indiscriminate selling, allowing funds to scale positions as prices fall.
Data from S3 Partners shows some of the largest short interest is concentrated in mid-cap and smaller names. More than 35% of TeraWulf’s free float is sold short, while Asana has around 25% of its shares on loan. Dropbox and Cipher Mining have roughly 19% and 17% of their tradable shares shorted, respectively.
Larger software names have also suffered steep declines. Microsoft is down about 15% this year, while Oracle has fallen more than 20%. Salesforce, Adobe and ServiceNow have each dropped in excess of 20%, while stocks such as Intuit and DocuSign are down more than 30%.
Despite the sharp equity sell-off, credit stress in the sector remains limited for now, according to market participants, with no significant drawdowns on revolving credit facilities observed to date.
Some hedge fund managers see the drawdown as evidence of a structural repricing underway in software, potentially setting the stage for increased M&A activity as larger players look to acquire weakened assets.
Market sentiment could shift again as a wave of software earnings reports is released in the coming days, though hedge funds remain positioned for continued volatility and further downside in the near term.
