Hedge Funds No Longer 'All In' on AI: US Equity Capital Shifts to Healthcare, Financials, and Energy

The severe volatility in AI trading is reshaping hedge fund positioning. After experiencing AI fervor in the second quarter and a sharp drawdown in July, hedge funds are accelerating their diversification, shifting capital from highly crowded AI-related positions to the healthcare, financial, and energy sectors.

According to Zhuifeng Trading Desk, Goldman Sachs' latest Hedge Fund Trends Monitor report shows that as of early Q3 2026, hedge funds' net overweight positions in healthcare, financials, and energy are all at or near ten-year highs. Among these, the net overweight in financials has risen to its highest level since before the 2008 financial crisis, while the net overweight in energy has hit a new high since 2015.

Meanwhile, the momentum reversal in AI trades in July triggered one of the most severe deleveraging waves for hedge funds in nearly a decade. The hedge fund VIP basket underperformed the S&P 500 Equal Weight Index by 11 percentage points in a single month, marking its worst relative performance in over 20 years of history.

This round of portfolio rebalancing sends direct market signals to investors. Historical data shows that hedge fund "Rising Stars"—stocks with the largest increase in new positions—often outperform their industry peers in subsequent quarters, while "Falling Stars" subject to massive reductions tend to underperform. The systematic increase in holdings in healthcare, financials, and energy may indicate that relative return opportunities in these areas are accumulating.

AI Trading Volatility Hits Hedge Funds Hard, July Becomes Watershed

The report is based on an analysis of holdings from 991 hedge funds, which collectively hold $5.4 trillion in total equity exposure ($3.4 trillion long and $2.0 trillion short).

Year-to-date, hedge fund performance has been tightly coupled with the rise and fall of AI trades. According to Goldman Sachs Prime Services estimates, US equity long/short hedge funds achieved a cumulative return of 10% from the beginning of the year to August 19. Performance was strong in Q2, with particularly notable gains in June, but weakened sharply in July as AI momentum reversed.

The drawdown in July was particularly severe. The Goldman Sachs VIP basket (GSTHHVIP) underperformed the S&P 500 Equal Weight Index by 11 percentage points from late June to late July, marking the worst single-month relative performance in the basket's over 20-year history, even exceeding the -9 percentage points seen during the October 2008 financial crisis. Meanwhile, both gross and net leverage for hedge funds fell significantly from historical highs in Q2, but remain elevated compared to longer-term historical averages.

Notably, the correlation coefficient between the year-to-date excess returns of the VIP basket and the Goldman Sachs AI basket is as high as 0.9, meaning that any fluctuation in AI trades directly transmits to the overall performance of hedge funds.

Still "All In" on AI in Q2, But Internal Divergence Emerges

Although hedge funds remained deeply committed to AI in Q2 overall, clear structural divergence emerged internally. The report shows that hedge fund portfolio turnover rose to its highest level since 2021 in Q2, with turnover within the information technology sector hitting a new high since 2011, reflecting large-scale position restructuring by fund managers within the AI theme.

In terms of specific holding changes, hedge funds reduced positions in most large-cap tech stocks in Q2, with Amazon and Microsoft being exceptions—both saw net increases. META joined the ranks of "Falling Stars," ranking among the top declines in the number of holding funds. NVIDIA's holding count remained relatively stable, but AI-related targets, including several semiconductor stocks, suffered massive net reductions, even though these stocks remained in an uptrend during the same period.

Among AI-related stocks, the targets with the largest net increases in hedge fund holdings included Advanced Energy Industries, ViaVi Solutions, and Digital Realty Trust, while those with the largest net reductions included semiconductor and equipment stocks such as Applied Materials, Micron, and Lam Research.

Healthcare, Financials, Energy: Three Sectors See Decade-Level Increases

Sector-level capital reallocation is one of the core signals of this report.

Healthcare became the sector with the largest net exposure for hedge funds, accounting for 19% of total net exposure, with an overweight of 962 basis points relative to the Russell 3000 Index, approaching a ten-year high. The increase was broad-based, with biotechnology being the most increased sub-sector, while managed care was the only exception. AXSM joined the "Rising Stars" of the quarter, and TMO newly entered the VIP holdings list. In healthcare-specific funds, the most popular holdings were concentrated in biotechnology, with BSX and UNH being the non-biotechnology exceptions.

The net overweight in financials rose to its highest level since before the financial crisis, with relatively balanced increases across sub-sectors. In financial-specific funds, regional banks were the most concentrated holding direction, with COF being one of the most popular holdings and also a member of the VIP list. CME and ICE ranked among the top in net increases in the number of hedge fund holders in the previous quarter.

The net overweight in energy rose to its highest level since 2015, also showing broad-based increases across sub-sectors.

In contrast, although the information technology sector remains the largest weighted sector in long portfolios (accounting for 25%), its net exposure is only 15%, presenting a record "underweight" status relative to the 33% weight in the Russell 3000 Index—however, this mainly reflects the sector's excessive weight in the benchmark index rather than an active avoidance of tech stocks by hedge funds.

Leverage and Shorts: Risk Exposure Remains at Historical Highs

Despite the volatility in AI trades, large-cap tech companies remain the most popular long holdings for hedge funds. AMZN topped the VIP list for the 11th consecutive quarter, with large-cap tech stocks occupying nine of the top ten spots. Historically, the VIP basket has outperformed the S&P 500 in 58% of quarters since 2001, with an average quarterly excess return of 50 basis points. However, year-to-date, the basket's cumulative return is 12.5%, slightly lagging behind the S&P 500's 13.4%, mainly dragged down by the AI drawdown in July.

Although it has fallen significantly from its peak, the overall risk exposure of hedge funds remains high. Data from Goldman Sachs Prime Services shows that the gross leverage of fundamental long/short funds is at the 73rd percentile of the five-year history, and net leverage is at the 38th percentile of the five-year history.

On the short side, leveraged funds hold near-record net short positions in Nasdaq 100 Index futures, with the short scale increasing by 35% since mid-June. Although the short interest ratio for the median stock in the S&P 500 has fallen slightly from its late-June high, it remains at its highest level in over 15 years.

Regarding ETF holdings, the proportion of ETFs in hedge fund long portfolios rose to 5.6%, the highest level since the financial crisis. Notably, $31 billion in ETF shorts account for 62% of hedge funds' total ETF exposure, indicating that funds are using ETFs more as hedging tools than for directional investment.