The Big ASX Short: Why hedge funds are betting against Gen Z’s favourite stocks

Retail investors are piling into some of the share market’s most popular stocks, while professional investors are quietly betting on them tumbling in value.

The divide is particularly stark among heavily traded companies that are favourites of younger retail investors, but also rank among the market’s most heavily shorted stocks.

Short selling is when a professional investor borrows shares and sells them, betting they can buy them back later at a lower price and pocket the difference.

Often the short sellers are betting against companies whose share prices have run well ahead of their underlying financial performance, with some still reporting consistent losses and close to zero revenue.

The growing divergence between retail enthusiasm and professional scepticism is setting up a volatile show down in some of the market’s hottest stocks.

4DMedical in spotlight

Medical software business 4D Medical has rocketed 593 per cent over the past year, giving it a market value of $2.3 billion at $3.81 per share on Thursday.

Yet the company reported an operating cash loss of $32.6 million on revenue of just $5.7 million for the year to June 30.

Hedge funds clearly believe 4D Medical is grossly overvalued at $2.3 billion and have short sold around 12.3 per cent of the total shares on issue.

Beginner investors in the Millennial and Gen Z age range though appear to take the opposite view.

Data from brokerage app Stake shows 4D Medical was the 10th most traded Australian stock among its predominantly younger customer base.

About 67 per cent of trades were buy orders, highlighting the strength of demand among mum-and dad or young investors despite the company’s stretched valuation.

Droneshield plunges

Counter-drone technology business Droneshield is also consistently among the most traded stocks on the ASX and a red hot favourite of retail investors.

Date from Australia’s largest retail broker, Commsec, shows Droneshield was the seventh most traded stock on the ASX in the week to August 21, attracting more trades than mining giant BHP and telco Telstra.

About seven out of 10 trades in Droneshield were buys, versus sells placed by retail investors.

The company’s adjacency to growing drone warfare in the Middle East and Ukraine even made it the most traded stock by Gen Z investors born between 1997 and 2012 in financial year 2026.

“Gen Z is more likely than older generations to embrace digital investment platforms, social media insights and emerging asset classes,” Commsec says.

The brokerage says younger investors are also more likely to hold ETFs and international securities, while older generations tend to have larger direct holdings of Australian shares.

That shift reflects a broader generational change in the way Australians are speculating to acquire wealth.

“Where 40 years ago, Baby Boomers and Gen Xers could buy a typical first home in Sydney or Melbourne for around 3-4 times the average salary of the time, Gen Zers face a price ratio of up to 14 times their average salary, following several decades of property values far outpacing average wage growth,” Commsec says.

“Consequently, investing in the stock market to generate capital has become an appealing alternative to property for many Gen Zers.”

Professional investors though believe Gen Z investors will cop painful losses and an expensive lesson on their Droneshield shares.

ASIC data shows 14 per cent of Droneshield’s outstanding shares have been shorted as hedge funds expect it to extends fall.

On Wednesday the stock plunged 11 per cent after the Sydney-based company reported a loss of $32.2 million for the six months to June 30. It blamed the weak result on soaring costs. Sales climbed 74 per cent to $125.8 million, but that is little use if it cannot sell its drone defence hardware at a profit.

The stock has now plunged 48 per cent over a calendar year in which its former chief executive and chairman both quit, after selling all their shares.

Commsec’s data shows Baby Boomers who prefer dividend-paying investments still hold the lion’s share of wealth, with $128.6 billion out of $281.2 billion total across all six generations.

Almost all of that wealth has been accumulated under more favourable capital gains tax settings than those set to be introduced from July 1, 2027.

Gen Z holds the smallest investment total of $4.6 billion or around 1.6 per cent of what Commsec holds on behalf of 2 million clients.

However, it is likely to be worst off from the Government’s tax hikes as it has the most time to accumulate capital gains over the decades ahead.

Other companies to have unusually high amounts of bets being placed against them include blue-chip miner Rio Tinto and rare earths producer Lynas Rare Earths.

But for now, the battle between new investors betting on the next big winners and professional investors betting against them is the market’s most intriguing fault line.