Hedge Funds Pocketed $24B Shorting Software — and Now they’re Piling in

With input from Bloomberg, Reuters, the Wall Street Journal, CNBC, Business Insider, and CNN.

If you thought the software sell-off was just a mood swing, think again. Hedge funds have already raked in roughly $24 billion shorting software stocks so far in 2026 as the sector’s market value plunged about $1 trillion, and sources on Wall Street say those bets are getting bigger. The strategy is brutally simple: find companies whose core products look easily replicable by new AI tools, then double down while everyone else’s exits get jammed.

Data from S3 Partners lays out the scoreboard: shorts have been wildly profitable, and the pain is broad. The iShares Expanded Tech-Software ETF (IGV) is a glaring poster child — down about 8% this week and more than 21% year-to-date, roughly 30% off its September high. That’s the kind of indiscriminate selling that short sellers salivate over: falling knives galore.

“We’re seeing a real net short position across hedge funds in software right now,” says Gil Luria, analyst at DA Davidson.

That lines up with what traders on the sell side are describing — not targeted one-off bets, but a broader hunt for vulnerable names in an industry waking up to a potentially structural reset.

Short sellers aren’t shy about where they see the meat. S3’s data show some extreme floats: more than 35% of TeraWulf’s tradable shares are sold short, 25% for Asana, and hefty short interest in Dropbox (19%) and Cipher Mining (17%). Those are the stocks where a squeeze could get dramatic — but for now, sellers seem confident.

Big, formerly reliable software names haven’t escaped either. Intuit and DocuSign have slid over 30% this year. Microsoft and Oracle — not immune to the rot — are down roughly 15% and 21%, respectively, while Salesforce, Adobe and ServiceNow have shed north of 20%. Even heavyweights can’t hide when the narrative shifts.

Shorting isn’t glamorous: you borrow shares, sell them, then hope to buy them back cheaper. But when whole swathes of an industry look ripe for disruption, short funds move en masse. Sources at two major hedge funds told reporters they’re upping exposure to software companies that sell basic automation — services AI can gobble up and reproduce fast.

That panic spike came into focus when Anthropic launched “Claude Cowork,” a suite of plugins that can triage contracts, read files and automate tedious workflows. The tool stoked fresh fears that a lot of bread-and-butter SaaS offerings could be rendered redundant — or at least face serious margin pressure — sooner than expected. Sell orders rippled across the sector: data firms, legal tech, document processors — all caught in a single day’s stampede.

“There’s been indiscriminate selling regardless of prospects,” one credit specialist observed, describing it as a short seller’s paradise.

When the market can’t distinguish winners from losers, the shorts can lock in returns and expand their positions.

Before you start imagining a credit meltdown, bankers say the plumbing is holding. Revolving credit lines haven’t been broadly tapped, so the immediate funding stress you’d expect in a full-blown squeeze hasn’t shown up. That gives vulnerable companies a little breathing room — but it doesn’t change the underlying problem of investor confidence.

Analysts are split on whether the rout is sentiment or substance. Some see a temporary overreaction: history is littered with AI doomsday predictions that didn’t pan out as first feared. Others argue this is a structural inflection point: if corporations start building AI tools in-house, or if generalized AI becomes cheap and accurate enough to replace many niche SaaS functions, consolidation and M&A are likely outcomes.

Earnings. Several software names are due to report in the coming days, and those quarterly check-ins could either calm nerves or add fuel to the fire. A string of beat-and-raises could blunt the short-sellers’ momentum; a few weak guides, especially on churn or pricing power, could send more pain into the sector.

Also worth watching: whether buyers step in to scoop up beaten down, fundamentally healthy names. Right now, it’s mostly hedge funds hunting downside; the buy side hasn’t broadly stepped forward to defend prices.

This is a market behaving like it believes software faces a real rewrite. Hedge funds that got in early have already banked billions and are leaning harder into those positions while the selling stays broad and indiscriminate. For investors in the space, the coming weeks will be a test: earnings and AI use cases will either separate the wheat from the chaff — or confirm that an entire business model needs to be rethought. Either way, the calm, long bull market for software looks like it’s on pause, and the people betting against it are doubling down.