Hedge funds accelerate tech selling as Goldman questions AI trade

Last Thursday, hedge funds engaged in the quickest technology stock selling in two years, sparking concerns about waning investor confidence following a prolonged period of heavy positioning and underwhelming returns, according to a Bloomberg report citing Goldman Sachs. Pasquariello, Goldman's leader in hedge fund coverage, disclosed that leveraged investors have been trimming both net and gross equity positions over recent weeks, with a 2.9% decline in the Nasdaq 100 on Thursday signifying a particularly pronounced unwinding.

Despite the S&P 500 trading within a narrow band for three months, hedge fund performance has deteriorated since late June as AI-heavy holdings have faced increased pressure. The sell-off is a blend of overconcentration and apprehension over the viability of AI-linked capital spending. Although demand for AI infrastructure persists, investors are increasingly questioning whether adequate power and capital will be available to sustain planned investments.

Heightened oil prices and lingering uncertainties ahead of the US midterm elections have further strained risk appetite. Pasquariello highlighted multiple signs of ongoing market strain, such as a month-long deleveraging among hedge funds, surging implied volatility, and lagging performance in cyclical stocks. Goldman's risk appetite gauge has turned negative for the first time since March, while the S&P 500, excluding AI stocks, is poised for its strongest relative month in three years.

Even though Goldman anticipates the broader equity rally to persist, Pasquariello advised caution against hastily repositioning risk. Goldman expects S&P 500 earnings growth to decelerate from 29% in 2026 to 18% in 2027, making equities more susceptible to macroeconomic challenges as investors reevaluate crowded tech holdings.