Chip Stocks Post Best Week Since April, but Hedge Funds Are Shorting the Rally

Chip Stocks Post Best Week Since April, but Hedge Funds Are Shorting the Rally

TREE NEWS reports: The Philadelphia Semiconductor Index surged more than 8% last week, its best performance since April, while the S&P 500 rose 2.5%. Yet hedge funds were net sellers of U.S. equities for a second consecutive week, and this time the selling was driven primarily by new short positions rather than the long liquidation seen the prior week. In other words, institutional investors used one of the strongest rebound weeks for chip stocks to place large bets on individual stocks falling.

The divergence extends beyond semiconductors. U.S. stock-picking funds returned just 1.78% for the week against a 3.27% S&P 500 gain, less than half the index. Multi-manager platform funds, known as pod shops, suffered their worst month on record in October, worse than March 2020. The U.S. information technology long-short ratio has fallen to 1.5, the lowest since the bank began keeping records in 2016.

Selling Into Strength, Not Buying the Dip

Goldman’s global prime brokerage book was net sold through last Thursday, at -0.7 standard deviations relative to the past year, with deleveraging accelerating and long sales outpacing short covering by 2.8 to 1. The U.S. market shows a stark structural split. Macro products, meaning indices and ETFs combined, were net bought for a third straight week at +1.2 standard deviations, and U.S.-listed ETF short positions fell 8.6%, the largest covering in seven months, concentrated in large-cap, credit and technology ETFs.

At the single-stock level, the picture is the opposite. U.S. single stocks were heavily net sold at -1.7 standard deviations, with long flows relatively quiet and almost all selling coming from new single-stock shorts. In sum, hedge funds swapped index hedges for single-stock short exposure, a mirror image of their positioning in October.

Tech Long-Short Ratio at Record Low; Financials See Largest Net Sale in Eight Months

Information technology remains the most heavily net sold sector globally and in the U.S. The U.S. tech long-short ratio has dropped from a June high of 2.14 to 1.5, a roughly 30% decline in five months, leaving hedge funds more than 20 percentage points underweight tech relative to the S&P 500.

Financials emerged as another prominent selling target, with net sales at -2.2 standard deviations and a combined long-and-short sale ratio of about 4 to 1, the largest net sale among U.S. sectors and in the 99th percentile of a five-year lookback. Payments processing, capital markets including investment banking and asset management, consumer finance and insurance were the main areas sold. Financials still account for 12.1% of Goldman’s U.S. net exposure, in the 98th percentile of the past year. Goldman’s financials specialist Christian DeGrasse noted that financial stocks underperformed the S&P by about 200 basis points last week with no clear split between defensive and cyclical names, suggesting position adjustment was the main driver, with particular pressure in consumer finance.

Health care extended its net selling streak to a fourth week, the fastest pace in seven months, entirely from long liquidation, led by biotech, pharmaceuticals and health care providers. Goldman’s health care specialist Jon Chan said clients are uneasy about valuations of large-cap biopharma, citing a comparison circulating on trading desks between Pfizer and Nvidia price-to-earnings ratios. When the safe haven looks more expensive than the risk asset, rotation pressure follows.

Leverage: Gross at 95th Percentile, Net at 3rd

Leverage data reveal the market’s deeper contradiction. U.S. fundamental long-short fund net leverage rose 2.1 percentage points to 45.4%, but the improvement came almost entirely from market gains and index hedge covering rather than active buying. Net leverage remains in the 2nd percentile of the past five years. Month-to-date, U.S. stock-picking funds have cut gross leverage by 5.8 percentage points and net leverage by 1.7 points. Globally, gross leverage sits at the 95th percentile while net leverage is at the 3rd. As Goldman derivatives strategist Brian Garrett has put it, fund size has not shrunk; it simply no longer points in any clear direction.

Goldman’s basket team data show momentum exposure in prime brokerage books has fallen from a 2026 high to the 23rd percentile of a five-year range, and crowding in the data center basket has dropped to the 1st percentile of the past six months. That factor accounted for roughly 60% of fund net value in the summer; it is now below 10%.

October: Worst Month on Record for Pod Shops

Monthly data are even more striking. Based on 488 hedge fund investor letters, Goldman’s monthly performance report shows the industry lost an average of 1.3% in October, with pod shops down 2.3%, which Goldman characterized as the worst month on record, worse than March 2020. Fundamental long-short funds lost 3.49% and systematic long-short, or quant, funds lost 3.6%, the first time since Goldman’s records began in 2016 that both strategies lost more than 3% in the same month. Year-to-date, pod shops are up just 0.1%, multi-strategy funds 1.2% and credit strategies 1.7%, against an 11.8% return for the S&P 500 and 14.4% for the Russell 2000.

Goldman’s chief TMT specialist Peter Callahan summarized that the week’s rebound was largely a product of position cleansing and intra-sector rotation, and that for now the market shows the least consensus it has had in a long time, which may actually be a relatively healthy starting point heading into 2027.

Is Positioning Cleansing Enough to Spark a New Rally?

The bull case is straightforward: net leverage is at a five-year low, momentum crowding has been flushed out and weak hands have exited. Morgan Stanley calculates that when its U.S. long-short net leverage measure is this low, the S&P 500 has averaged about 6.3% over the next three months and 20.7% over twelve months, roughly double normal levels. Goldman’s macro trading team also sees conditions for a year-end short squeeze after one of the most aggressive de-risking episodes of the past decade.

But hedge fund behavior tells a different story. Goldman’s derivatives team notes that VIX put option volume over the past 10 trading days exceeded any prior period in 2026, showing more confidence in falling volatility than in rising spot prices. The Philadelphia Semiconductor Index’s 6.85% single-day jump on Monday confirmed the market’s explosive upside potential when net leverage is extremely low and shorts are crowded. Yet whether the market can rise and whether anyone is willing to buy are two different questions. Facing a 2.5% weekly rebound, a record-low tech long-short ratio and the lightest positioning in five years, hedge funds are still shorting more individual stocks.

Key Takeaways for Investors

• Positioning divergence is the core signal: A powerful chip-led rebound coincided with fresh single-stock shorts, suggesting institutional investors distrust the breadth of the rally even as index-level hedging was reduced.
• Tech underweight is extreme: A record-low long-short ratio and more than 20 percentage points of underweight versus the S&P 500 create squeeze potential, but also reflect genuine concern about valuations and concentration.
• Leverage structure is fragile: Gross leverage near the 95th percentile with net leverage at the 3rd means funds retain capacity to add risk but lack directional conviction, a recipe for sharp, headline-driven moves.
• Watch financials and health care: Heavy net selling in financials and a fourth week of health care liquidation point to rotation pressures that could persist if valuation anxiety builds.
• Volatility markets are pricing calm: Heavy VIX put volume suggests investors expect subdued volatility, leaving the market vulnerable to upside surprises or abrupt reversals if positioning unwinds.