Tech Stocks See Decline as Hedge Funds Increase Short Bets

Tech Stock Liquidation

Global hedge funds have unloaded their tech stocks at alarming rates during the week leading to February 23, the likes of which haven't been seen in nearly eight months, according to a report by Goldman Sachs. In a shocking twist, on the heels of Nvidia's latest soaring earnings, these hedge funds ironically placed bets against the tech sector. The analysis by Goldman Sachs reveals that in terms of volume, this sell-off ranks among the top in the past five years.

Contrasting Market Sentiment

The tech-centric Nasdaq, along with other stock indices, has seen record-breaking performances driven by promising prospects in artificial intelligence. Nvidia, the notable chip manufacturer, saw Thursday's one-day gain lift its stock market value by a staggering $277 billion, the most significant in Wall Street history, setting distinguished industry expectations. However, sensing a possible downturn, twice as many hedge funds now hold a skeptical view of tech stocks, betting that their prices will soon plummet, as stated by Goldman Sachs.

Increasing Short Bets

Hedge Fund investors, not focusing on any specific companies in particular, placed their bets against a wide range of tech stocks. They chose to turn their back on long positions and increased their short positions on tech company stocks specializing in semiconductor industry machine and service equipment, IT services, tech hardware, and storage. Adding to their short positions, they also targeted software company stocks.

Unwilling to Sever all Ties

A separate analysis from Goldman Sachs suggests hesitance amongst traders to completely discard their positive outlook on tech. Despite the apparent shift in sentiment, they hit a two-year high in Nvidia call options. Using this trading strategy, traders take a long position only if the stock price exceeds a specified threshold, theoretically maintaining a favorable view of the stock only if its price rises to a certain level.

Hedge Funds Stray From U.S. Stocks

With traders bearish on U.S. stocks, a significant selling occurred for the first time in five weeks. Surging service sector prices in the U.S further feed the inflation fears, leading to a delay in expected interest rate cuts in 2024, complicating hopes for a smooth market landing. Consequently, traders switched their focus away from tech, health care and industrial stocks, locking in on the largest consumer staples stocks purchase in over ten weeks. The purchase included stocks in retail, beverages, distribution, and household products, excluding tobacco stocks, according to Goldman Sachs.

Increased Regulatory Oversight

Global regulators have imposed strict scrutiny on e-cigarettes, potentially creating hurdles for tobacco companies producing this product. The World Health Organization (WHO), in December 2023, suggested that all governments should regulate e-cigarettes in the same way as regular cigarettes and eliminate all flavor options.