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Hedge funds lag S&P 500 in July as crowded AI trades unwind

Goldman data cited by Hedgeweek showed the most widely held AI stock basket logged its worst one-month relative performance versus the S&P 500 in over 20 years, alongside a pronounced hedge fund de-grossing episode.

Reported · Written up by our desk · Hedge Funds

Hedge funds posted their sharpest monthly underperformance versus the S&P 500 in more than two decades in July as a reversal in AI-linked stocks prompted managers to cut positions and reduce exposure to some of the market’s most crowded trades, according to Hedgeweek, citing CNBC and Goldman Sachs data.

Goldman said its basket of the stocks most widely held by hedge funds suffered its worst one-month performance relative to the S&P 500 in more than 20 years of data. The shift also triggered one of the most pronounced hedge fund de-grossing episodes of the past decade, with managers trimming holdings across AI-related equities, including semiconductors and several mega-cap technology names.

The report said the change followed a period when hedge funds aggressively leaned into the AI theme, with portfolio turnover reaching its highest level since 2021. Goldman estimated that hedge funds began diversifying away from AI as the trade lost momentum, reducing exposure to some semiconductor stocks and mega-cap technology companies.

Despite the July setback, Hedgeweek said US equity long short hedge funds stayed profitable for the year, with Goldman estimating the strategy returned about 10% through the middle of August, even as hedge funds reduced gross leverage, net leverage, and overall AI exposure from second quarter levels.

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