Goldman says hedge funds suffered worst underperformance vs S&P 500 in July in more than 20 years of data

• Goldman's Hedge Fund VIP list of most popular long positions suffered its worst 1-month underperformance versus the S&P 500 in more than 20 years of data history
• Hedge funds trimmed positions in AI stocks including semiconductors and mega-cap tech after entering Q2 'all in on AI' with portfolio turnover at highest levels since 2021
• While hedge fund gross leverage, net leverage, and AI exposure declined from Q2 highs, they still remain above longer-term averages

Summary

Key Findings:

According to Goldman Sachs strategists led by Ben Snider, hedge funds experienced their worst one-month underperformance versus the S&P 500 in over 20 years of data during July. The period also marked one of the sharpest hedge fund "de-grossing episodes" of the past decade, as funds significantly reduced their positions.

Market Movement:

The historic underperformance coincided with an unwinding of AI momentum. Hedge funds trimmed holdings in AI stocks, including semiconductor companies and mega-cap technology names, after entering Q2 "all in on AI" with portfolio turnover at the highest level since 2021. Goldman's Hedge Fund VIP list—tracking the most popular long positions—suffered unprecedented losses relative to the broader market.

Sector Impact:

In Q2, hedge fund crowding in AI stocks reached record levels, with technology accounting for 14 of the 20 "Rising Stars" (stocks with the largest increases in hedge fund popularity). However, July saw funds begin diversifying away from artificial intelligence investments.

Current Position:

Despite the volatility and reduction from Q2 peaks, hedge fund gross leverage, net leverage, and AI exposure remain above longer-term averages. Through mid-August, US equity long/short hedge funds have still delivered 10% returns year-to-date.

Implications:

The sharp reversal highlights the concentration risk hedge funds faced in AI-related positions and suggests a potential sector rotation as funds rebalance portfolios. The de-grossing episode reflects broader market uncertainty around AI valuations and growth sustainability.