According to Wall Street investment bank Goldman Sachs (GS), hedge funds posted their worst market underperformance in 20 years this July as the artificial intelligence (A.I.) trade unwound.
Leading hedge funds got caught flatfooted as the A.I. trade collapsed in July due to an overconcentration in stocks tied to the A.I. infrastructure buildout, says Goldman Sachs.
In a note to clients, Goldman Sachs said that hedge funds were “all in on AI” prior to the July pullback, which saw leading chipmakers such as Micron Technology (MU) and SanDisk (SNDK) decline more than 30% during the month.
Fortunately, hedge funds have begun to diversify their portfolios and hold less concentration in A.I. stocks, with portfolio turnover in August at the highest level since 2021, says the bank.
“Funds trimmed positions in a number of AI stocks, including many semiconductors and most of the mega-caps,” writes Goldman Sachs.
Despite the July declines, hedge funds delivered strong gains in the second quarter as the market was driven higher by popular A.I. stocks.
During Q2 of this year, technology stocks accounted for 14 of the 20 most popular stocks held by U.S. hedge funds.
Goldman Sachs concludes that hedge funds have returned an average of 10% on their equity portfolios through mid-August of this year.
That return is slightly below the benchmark S&P 500’s 12% year-to-date gain.
Leading U.S. hedge funds include privately held names such as Citadel, Bridgewater Associates, and Renaissance Technologies.
