Hedge funds posted their worst monthly performance relative to the S&P 500 in more than two decades in July as popular artificial intelligence positions unwound, according to CNBC , citing a Goldman Sachs report.
"Our Hedge Fund VIP list of the most popular long positions suffered its worst 1-month underperformance vs. the S&P 500 in more than 20 years of history, and July marked one of the sharpest hedge fund de-grossing episodes of the past decade," Goldman strategists led by Ben Snider said, according to CNBC. The bank added that funds reduced exposure across the AI space, with semiconductors and the majority of large-cap technology names among the areas where positions were cut.
The July reversal followed a strong second quarter in which hedge funds delivered gains as AI stocks fueled the broader market. Goldman said hedge fund crowding reached a record level during that period, with technology representing 14 of the 20 so-called Rising Stars last quarter — a Goldman designation for stocks that attracted the biggest jumps in hedge fund ownership.
Funds entered the most recent quarter having pushed portfolio turnover to levels not seen since 2021, a positioning that Goldman characterized as going "all in on AI." Since then, funds have begun pulling back from AI positions and diversifying their holdings. Goldman noted that all three metrics — gross leverage, net leverage, and AI exposure — have pulled back from where they stood at the end of the second quarter, yet continue to sit above their longer-run historical norms.
Despite the July downturn, Goldman reported that U.S. equity long/short funds had managed to build a 10% gain for the year through the middle of August.
The retreat from AI-linked positions has not been limited to hedge funds. Institutional investors have shown fatigue in heavily owned AI names, a trend that has included broader selling pressure in large-cap technology stocks , with bearish traders appearing more willing to re-enter unprofitable parts of the technology sector, according to Vanda Research.
The broader unwind has also claimed at least one high-profile casualty. Leopold Aschenbrenner's hedge fund, Situational Awareness, lost roughly $35 billion in assets after margin calls forced a distressed sale of its publicly traded holdings to Ken Griffin's Citadel. The fund, which peaked at $45 billion at the start of July, had used as much as 400% leverage and concentrated its bets in AI infrastructure names including SK Hynix and CoreWeave.
