Hedge Funds Stay Bullish on AI After July Rout: Goldman Sachs
TREE NEWS reports: Despite a brutal July selloff that tested investor nerves, hedge funds have not abandoned their conviction in artificial intelligence. According to a new report from Goldman Sachs, which tracks nearly 1,000 hedge funds with a combined $5.4 trillion in gross equity exposure, the industry is still heavily positioned in big tech, with AI remaining the dominant investment theme.
The report, covering data through August 19, shows that hedge funds are still up 10% year-to-date on average. However, July was one of the worst months for hedge funds relative to the S&P 500 in nearly two decades, exposing the fragility of crowded trades. The sharp deleveraging that followed was the most aggressive in a decade, according to Ben Snider, head of Goldman’s portfolio strategy research team.
What Happened in July?
The selloff was triggered by weakness in semiconductor stocks and a wave of earnings reports from hyperscale cloud companies. Investors began to question whether the massive capital expenditures on AI infrastructure could sustain their growth trajectory. As a result, the AI trades that had performed best in Q2—and were also the most added by funds—suffered the deepest losses in July. This classic crowded-trade unwind led to a broad reduction in both net and gross leverage.
AI Still the Core Theme, But Diversification Is Rising
Despite the turmoil, hedge funds have not rotated away from AI. Amazon remains the most popular stock for the 11th consecutive quarter, and nine of the top ten holdings are AI-related, with Visa being the only exception. Funds are also extending their AI exposure along the value chain, increasing positions in data centers, AI infrastructure, and power equipment companies.
At the same time, there is a clear shift toward diversification. Net positioning in healthcare, financials, and energy has risen to decade highs, while ETF long exposure has climbed to 5.6% of total holdings—the highest since the 2008 financial crisis. This suggests that while AI remains the core bet, funds are building defensive buffers in other sectors.
Market Impact: What Does This Mean for Investors?
- Stocks: The persistent demand for AI-related equities, especially mega-cap tech, could provide a floor under these names despite volatility. However, the high concentration in crowded trades means any negative AI news could trigger sharp selloffs.
- Bonds: Hedge funds’ reduced leverage and increased diversification into defensive sectors may reduce systemic risk, but it does not directly impact bond yields. If AI capex continues to fuel economic growth, yields could stay elevated.
- Crypto: The AI theme has some overlap with crypto, particularly in data center and energy demand, but the direct impact is limited. Crypto remains driven by its own dynamics.
- Commodities: The rise in energy sector positioning could support oil and gas prices, while AI-driven electricity demand is a long-term bullish factor for power and related commodities.
- Currencies: The US dollar could see support if AI-driven productivity gains keep the US economy outperforming. However, risk-off episodes could still lead to safe-haven flows.
Key Takeaways for Investors
First, AI remains the most important investment theme, and hedge funds are not abandoning it. Second, the July rout was a wake-up call about the risks of crowded trades, prompting funds to diversify. Third, investors should monitor positioning data as a contrarian indicator: extreme crowding can lead to sharp reversals, but a resilient core trend can persist. Finally, the shift into healthcare, financials, and energy suggests that a more balanced approach may be prudent, even for those who remain bullish on AI.
