Hedge funds made $24 billion shorting software stocks so far in 2026 — And they are increasing the bet

CNBC Top News | By a Senior Financial Correspondent Jan. 28, 2026

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Hedge funds are waging a massive, and so far, wildly successful, campaign against the software sector, netting a staggering $24 billion in profits by betting on its decline in the first month of 2026 alone. As the industry's collective market value has plummeted by over $1 trillion, these institutional investors are not cashing out; they are doubling down, sources at two major Wall Street funds confirm.

The brutal sell-off that has defined the start of the year for software companies is being both fueled and exploited by a growing consensus among short-sellers. They believe the sector, once a darling of the growth-at-all-costs era, is now uniquely vulnerable to a new and powerful disruptive force: artificial intelligence.

The $24 Billion Payday

The scale of the bet against software is immense. Data analytics firm S3 Partners confirmed that mark-to-market profits for short-sellers in the software space have crossed the $24 billion threshold year-to-date.

This windfall corresponds directly with a catastrophic loss in shareholder value. The total market capitalization of the software industry has contracted by more than $1 trillion from its peak, a clear signal of a fundamental re-evaluation by the market.

According to Gil Luria, a technology analyst at D.A. Davidson, this is not a niche strategy. "Hedge funds are all net short software right now," Luria stated, indicating a broad, sector-wide conviction that the pain is far from over.

The AI Disruption Thesis

The core of the bearish argument centers on the rapid advancement and accessibility of generative AI tools. Hedge fund sources, who spoke on the condition of anonymity, revealed their focus is on a specific type of company that now appears overvalued and obsolete.

• Primary Target: The funds are aggressively shorting companies that provide basic, often expensive, automation services for enterprise clients.
• The Threat: The value proposition of these software-as-a-service (SaaS) firms—automating workflows, generating content, or analyzing simple data sets—is now being replicated, and often surpassed, by new AI platforms at a fraction of the cost.
• Value Erosion: The logic is simple: why would a client pay a premium for a niche automation tool when a more powerful, general-purpose AI can perform the same task, and many others, more effectively and cheaply? This dynamic threatens the entire business model for a significant sub-sector of the software industry.

This isn't just about competition; it's a potential extinction-level event for software companies that lack a deep, proprietary moat.

Anatomy of a "Falling Knife"

In market parlance, traders are drawn to "falling knives"—stocks or sectors experiencing rapid, indiscriminate selling. While catching such a knife can be dangerous for buyers, it presents a prime opportunity for short-sellers to increase their bets and ride the negative momentum down.

The software space is currently the market's most prominent falling knife.

The iShares Expanded Tech-Software Sector ETF (IGV), a key benchmark for the industry, provides a stark illustration of the carnage.

• Weekly Loss: The ETF plunged another 8% this week alone.
• Year-to-Date Performance: IGV is now down more than 21% since the start of January.
• From the Highs: The fund has cratered 30% from its all-time high, which was set in September of last year, wiping out a significant portion of the post-pandemic gains.

This sustained, high-velocity decline creates a feedback loop. As prices fall, more technical sell signals are triggered, forcing long-term holders to capitulate and emboldening short-sellers to increase their positions.

The Broader Context: A Post-Pandemic Reckoning

The current software slump is an acceleration of a correction that began over a year ago. The zero-interest-rate policy (ZIRP) era fueled a speculative bubble in technology, where valuations became detached from fundamental metrics like profitability and cash flow.

Software companies, with their promise of high-margin, recurring revenue, were at the epicenter of this boom. Now, in a higher-rate environment, investors are forced to scrutinize balance sheets and competitive advantages far more closely.

• Valuation Reset: The era of paying 50x or 100x revenue for unprofitable software companies is definitively over. The market is returning to fundamentals.
• Crowded Trade Unwinds: Just as hedge funds crowded into momentum software stocks on the way up, they are now coordinating, consciously or not, on the way down. The current short-selling frenzy is the mirror image of the 2021 buying mania.

What to Watch Next

The battle lines are clearly drawn. On one side are the software companies, now under immense pressure to prove their enduring value. On the other are the hedge funds, betting that many of them will fail to do so.

• Earnings Season: Upcoming quarterly earnings reports will be critical. Investors will be laser-focused on guidance and any commentary regarding the impact of AI on customer retention and pricing power. A company that can articulate a clear and convincing AI strategy may be spared, while those that cannot will likely face further selling.
• Short Interest Levels: Market participants will closely monitor short interest data from firms like S3 Partners. A continued increase in short positions would signal that hedge funds believe there is more downside to come. A sharp decrease, however, could indicate the beginning of a bottoming process.
• The Risk of a Squeeze: While the shorts are currently in control, they are not without risk. Any unexpected positive catalyst—such as a surprise earnings beat, a major product innovation, or a shift in macro sentiment—could trigger a violent "short squeeze," forcing them to buy back shares at a loss and sending stock prices soaring.

For now, however, the momentum, the narrative, and the profits all belong to the bears. The $24 billion they've already made suggests their AI-driven thesis is resonating, turning the once-unassailable software sector into Wall Street's most lucrative short.