Hedge Funds Increase Bets Against Small-Cap Stocks Amid Trade War Concerns

Hedge funds are increasing bets against small-cap stocks in the US, with a net short position of $16 billion in July, as concerns linger about the economy's resilience in a global trade war. Small-cap firms are more sensitive to economic fluctuations due to weaker balance sheets and lower borrowing capacity. Growth worries and higher interest rates are also contributing to the bearish tilt.

Hedge funds are ramping up their bets against small-cap stocks in the United States, with a net short position of $16 billion in July. This move comes as concerns linger about the economy's resilience in the face of a global trade war. According to Goldman Sachs Group Inc., the short position on the Russell 2000 Index has reached one of the highest levels since 2021 [2].

Small-cap firms are more sensitive to economic fluctuations due to their weaker balance sheets and lower borrowing capacity. The Russell 2000 Index, which tracks the performance of small-cap stocks, has outperformed large-cap stocks in its rally from April lows, but some investors are skeptical that US growth will remain strong enough to support further gains [2].

Jon Caplis, CEO of hedge fund research firm PivotalPath, attributes the bearish tilt towards small caps to the return of inflationary pressures and the likelihood of higher interest rates for longer. These factors impact small-cap margins, growth, and indebtedness [2].

While the Russell 2000 Index is up 26% from its April lows, some investors are warning that its sizzling rally may be a sign that risk sentiment is overheating. Max Gokhman, deputy chief investment officer at Franklin Templeton Investment Solutions, has been cautious about being too negative on small caps due to the possibility of a short squeeze. However, given the economy's resilience and the prospect of higher long-dated yields, he remains bearish on small caps [2].

The bearish thesis around small caps could take a hit if growth remains firm or if tame inflation bolsters the case for the Federal Reserve to lower interest rates. Traders are leaning towards the central bank lowering borrowing costs as soon as September, but more likely in October [2].

References:
[1] https://www.quiverquant.com/news/COLLPLANT+BIOTECHNOLOGIESNEW+Earnings+Preview%3A+Recent+%24CLGN+Insider+Trading%2C+Hedge+Fund+Activity%2C+and+More
[2] https://www.bloomberg.com/news/articles/2025-07-17/hedge-funds-take-aim-at-small-cap-stocks-after-torrid-rally
[3] https://www.ainvest.com/news/origin-bancorp-q2-earnings-hedge-fund-positioning-signal-term-upside-2507/
[4] https://www.investing.com/news/stock-market-news/boston-feds-collins-advocates-patience-on-interest-rates-93CH-4136458