Goldman Sachs has reported that hedge funds experienced a historic setback in July as the artificial intelligence trade cooled off. Strategists led by Ben Snider noted in a report that their basket of the most crowded long positions, known as the Hedge Fund VIP list, posted its worst monthly performance relative to the S&P 500 in over two decades. The month also ranked among the most aggressive deleveraging periods for funds in the past ten years.
The report highlighted that funds trimmed positions across multiple AI-related equities, including a significant number of semiconductor names and most of the major large-cap technology leaders. This marks a notable shift, as hedge funds had entered the previous quarter with a strong commitment to AI, driving portfolio turnover to its highest level since 2021. Now, however, they are beginning to diversify away from the sector.
Goldman Sachs observed that over the past few months, hedge fund performance, leverage levels, and the most favored long positions have all swung sharply in tandem with the AI trade. The bank noted that the rally in popular AI stocks delivered substantial gains for funds in the second quarter, but it also pushed crowding in their portfolios to record highs. Among the top 20 so-called "rising star" stocks that saw the largest increases in fund ownership last quarter, technology companies accounted for 14 of them.
Despite the recent pullback, Goldman Sachs indicated that while total leverage, net leverage, and AI exposure have all retreated from their second-quarter peaks, they remain above long-term averages. The firm added that despite the market turbulence, U.S. equity long/short hedge funds are still up 10% for the year through mid-August.
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