Hedge funds suffer historic July setback as AI trade unravels
Hedge funds endured their sharpest monthly underperformance against the S&P 500 in more than two decades in July, as a reversal in AI stocks forced managers to cut positions and reduce exposure to some of the market’s most crowded trades, according to a report by CNBC citing data from Goldman Sachs.
Hedge funds experienced their most significant monthly decline against the S&P 500 in over two decades in July, as a shift in AI stocks compelled managers to shrink positions and decrease exposure to some of the most popular trades, according to data from Goldman Sachs. The bank's analysis revealed that a portfolio of widely held AI stocks had its worst one-month performance relative to the S&P 500 in more than two decades.
This reversal triggered a notable wave of hedge fund de-grossing, with managers cutting positions across various AI-related sectors, such as semiconductor companies and several large-cap technology firms. This abrupt change in investment strategy came after hedge funds had heavily invested in the AI theme during the second quarter.
The initial strategy proved successful, as popular AI-linked stocks contributed to robust hedge fund returns during the period. However, the subsequent decline forced managers to reassess their positions. Goldman noted that hedge funds began diversifying away from AI as the trade lost momentum, reducing exposure to previously favored semiconductor stocks and mega-cap technology companies.
Despite the setback, US equity long-short hedge funds remained profitable for the year, with Goldman estimating a 10% return through mid-August.
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