Hedge funds are broadly pulling back from high-conviction trades across asset classes — with one notable exception – a growing appetite for shorting US equities, according to a report by Bloomberg citing data from hedge fund replication firm Unlimited.
Market conviction – the confidence hedge funds have in specific positions — remains historically low, with positioning across currencies, bonds, and commodities sitting in the bottom 10th percentile relative to data going back to 2000, reflecting investor uncertainty spurred by escalating policy risk.
Despite this caution, short interest in US equities is rising, particularly among equity long/short managers. “Fund managers are paying less attention to rhetoric and more to the actual policy landscape — which is broadly negative for risk assets right now,” said Bob Elliott, former Bridgewater Associates executive and now CEO of Unlimited.
This shift comes in the wake of US President Donald Trump’s abrupt rollout of new tariffs earlier this month — only to walk them back days later. The resulting policy whiplash has prompted hedge funds to keep risk capital in reserve, opting for nimbleness in an environment marked by conflicting signals and geopolitical uncertainty.
While US retail investors continue to buy the dip, many hedge funds are positioning for downside, even as the S&P 500 posts its longest winning streak since November.
According to Elliott, “We’re seeing US equities underweight positions that rival levels during the financial crisis,” adding that only a few periods since 2000 have seen such aggressive bearish sentiment.
While US small- and mid-caps face broad shorting pressure, selective long positions are emerging in financials and banks, where valuations remain appealing.
Emerging markets meanwhile, especially China, continue to draw interest, with hedge funds focused on the asset class delivering a 6.3% gain in Q1, far outpacing the broader industry’s 1.7% return.
