Software group sinks over 25% as shorts pile into big tech names
Hedge funds have turned software into a high-conviction short – and they are already up about US$24bn on the trade this year.
According to CNBC, short-sellers have made roughly US$24bn in gains as software’s overall market value has shrunk by about US$1tn, based on S3 Partners data.
Hedge fund sources told CNBC they are targeting companies that offer basic automation services they believe new AI tools can easily replicate.
The iShares Expanded Tech-Software ETF (IGV) is down more than 21 percent year to date and sits about 30 percent below its all-time high from September last year.
Within IGV, S3 data cited by CNBC show heavy short interest in TeraWulf and Asana, with more than 35 percent and 25 percent of their trading floats sold short respectively, while Dropbox and Cipher Mining sit at 19 percent and 17 percent.
Intuit and DocuSign are each down more than 30 percent this year, and large holdings such as Microsoft, Oracle, Salesforce, Adobe and ServiceNow have all fallen between the mid-teens and more than 20 percent.
As per Bloomberg, this is a software-specific drawdown rather than a broad collapse in mega-cap tech.
Leon Gross, director of research at S3 Partners, said “This is a software-specific phenomenon; the broader Mag 7 is essentially unchanged.”
Short interest is rising in Microsoft, Oracle, Broadcom and Amazon.com, with S3 data showing short interest in Microsoft up about 20 percent this year and Oracle up about 10 percent.
Gross said Microsoft, which typically trades like a “reversal stock” with shorts covering into weakness, now looks more like a “momentum-driven, distressed name” as shorts increase positions on the way down.
The selloff is also part of a wider rotation.
Bloomberg reports that traders are moving out of large tech “safe” names and into sectors more directly tied to improving growth, with commodity producers, consumer staples and banks gaining even as software and chipmakers sell off.
Despite that pressure, CNBC cites a banker who says revolving credit lines in the software sector are not being drawn, suggesting limited immediate stress on the credit side.
Positioning and timing now dominate the debate.
Bloomberg notes that the S&P 500 software group has dropped more than 25 percent since its October high.
Jeffrey Yale Rubin at Birinyi Associates said the average bear market decline in the group is about 32.53 percent, with the worst slide of 53.94 percent during the global financial crisis.
Bret Kenwell at eToro told Bloomberg that software stocks are being “decimated” by worries that AI will cannibalize their businesses, but he pointed out that many firms still deliver solid earnings and revenue growth and that analyst expectations for those metrics continue to trend higher.
He argued the group is nearing “oversold” and “capitulation” levels, while warning that once this selloff ends, a lower valuation ceiling could cap upside even for high-quality names.
Some strategists frame the move as a reset rather than a break.
Matt Maley at Miller Tabak told Bloomberg that while the headlines keep getting worse for software, the group looks “poised for a nice bounce” in the near term, and he cautioned against aggressive negative bets over short horizons.
Chris Senyek at Wolfe Research described the episode to Bloomberg as “another AI scare” in software and said he would use weakness to buy AI-related semiconductor stocks, while Mark Hackett at Nationwide called it “a rotation, not a rupture,” arguing that seeing this shift near record index levels underlines the market’s underlying strength.
