Goldman Sachs says the hedge fund cohort’s most popular long positions lagged the S&P 500 by the widest monthly margin in over twenty years of data during July, a stretch that also ranked among the sharpest de-grossing episodes of the past decade. The move matters because it marks the point where the AI momentum trade that had powered fund returns through the second quarter not only stalled but reversed, forcing a rapid unwind of crowded semiconductor and mega-cap positions.
The AI unwind shows up in the numbers
Strategists led by Ben Snider noted that funds trimmed exposure across a swath of AI names, including most of the mega-caps and a broad set of semiconductors. The VIP list, Goldman’s proxy for the consensus long book, had ridden the AI wave higher through June; its July collapse confirms that the same concentration that amplified gains on the way up became a liability when the theme cracked.
Crowding hit a record before the turn
Portfolio turnover in the second quarter reached its highest level since 2021 as managers went “all in on AI,” Goldman said. Crowding metrics climbed to a record, and technology stocks accounted for fourteen of the twenty “Rising Stars”, the names with the largest quarter-over-quarter jumps in hedge fund ownership. The speed of the subsequent exit suggests the positioning was more fragile than the headline returns implied.
Leverage still above average despite the pullback
Gross leverage, net leverage, and AI exposure have each retreated from their second-quarter peaks, yet all three remain above longer-term averages. The de-grossing was real but incomplete; funds are still running more risk than history would consider normal, which leaves room for further reduction if the AI repricing continues.
Long/short funds still up double digits
For all the July pain, US equity long/short funds have returned roughly 10 percent through mid-August. The year-to-date gain reflects the strong second quarter more than the recent drawdown, a reminder that the crowding unwind has so far dented relative performance more than absolute capital.