Goldman Sachs has reported that hedge funds experienced their worst monthly performance relative to the S&P 500 index in over two decades of recorded data during July. The investment bank noted that this period also marked one of the most significant reductions in total hedge fund positioning seen in the past ten years.
According to Goldman Sachs, hedge funds began trimming their exposure to artificial intelligence-related stocks in July, opting instead to diversify their portfolios. As the AI sector's momentum cooled, funds faced a historic performance setback during the month.
The strategy team led by Ben Snider at Goldman Sachs stated that their tracked VIP basket of popular hedge fund long positions posted the largest single-month underperformance versus the S&P 500 in more than 20 years. July also ranked among the most aggressive deleveraging periods for hedge funds over the past decade. The report further noted that numerous funds reduced positions across multiple AI stocks, including a wide range of semiconductor names and most of the major big-cap technology companies.
Goldman Sachs data reveals that while hedge funds had been heavily concentrated in artificial intelligence bets last quarter, with portfolio turnover reaching its highest level since 2021, they have now begun rotating away from the AI sector. The bank indicated that over recent months, hedge fund performance, leverage levels, and the most crowded long positions in the market have all experienced sharp volatility in tandem with the AI trade.
The report highlighted that hedge funds generated substantial gains in the second quarter, driven by the rally in popular AI stocks, which also pushed crowding levels in these trades to record highs. During the previous quarter, technology stocks accounted for 14 of the 20 so-called "rising star" positions that saw the largest increases in hedge fund holdings.
Despite these developments, Goldman Sachs noted that while total leverage, net leverage, and AI sector exposure have all retreated from their second-quarter peaks, they remain above long-term averages. Even amid heightened market volatility, US equity long/short hedge funds have still delivered a return of approximately 10% through mid-August.
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