In a surprising turn of events, hedge funds are leaning more bearish—even as markets rally. Fresh data from prime brokerage desks shows that hedge funds have significantly increased their short positions in individual U.S. stocks, signaling skepticism about the recent market optimism.

This ramp-up in short activity comes right on the heels of President Trump’s announcement to pause most U.S. tariffs. While that move sparked a broader market rally, hedge fund behavior suggests a less rosy view beneath the surface.

Single-Stock Shorts Climb

Short positions in single U.S. equities surged nearly 2% in just one day. The increase was broad-based across all sectors, with the exception of Utilities. Notably, Financials saw the heaviest shorting activity, outpacing other sectors by a wide margin. This trend suggests that hedge funds might be anticipating trouble ahead for banks and financial institutions, despite strong market performance elsewhere.

ETF Shorts See Major Covering

Interestingly, while single stocks were aggressively shorted, the story was different on the ETF front. Hedge funds actively covered positions in broad market ETFs—most notably SPY, the S&P 500 tracker—which saw notional covering more than twice the size of the next four ETFs combined. Other popular ETFs seeing notable short covering included KWEB, TLT, XLK, and XLP.

The ETF short book was net covered by 5.4% day-over-day, reflecting a rapid shift out of bearish ETF positions—perhaps a tactical move to hedge against short equity exposure elsewhere.

Mixed Signals or Strategic Play?

The divergence between ETF covering and single-name shorting highlights a strategic recalibration. Rather than betting against the entire market, hedge funds appear to be zeroing in on specific companies and sectors they view as vulnerable.

Overall, the message is clear: hedge funds aren’t buying the rally wholesale. While some are stepping back from broad bearish ETF bets, many are sharpening their focus on short opportunities within individual stocks—particularly in sectors like Financials.

In a market fueled by headlines and policy shifts, it seems hedge funds are preparing for volatility, not complacency.