Hedge funds are no longer all in AI: US equity funds are shifting towards healthcare, finance, and energy.

The dramatic volatility in AI trading in July marked a watershed moment. Goldman Sachs noted that hedge fund VIP holdings underperformed the S&P 500 equal-weighted index by 11 percentage points in July, marking the worst performance in over 20 years. Against this backdrop, hedge funds shifted their crowded AI positions to the healthcare, financial, and energy sectors. Overweighting in the financial sector reached its highest level since before the financial crisis, while energy holdings hit a new high since 2015. This decade-long rebalancing may indicate a new round of relative return opportunities is accumulating.

The dramatic volatility in AI trading is reshaping hedge fund portfolios. Following the AI frenzy in the second quarter and the sharp pullback in July, hedge funds are accelerating their diversification efforts, shifting funds from highly crowded AI-related positions to the healthcare, financial, and energy sectors.

According to the Trends Trading Platform, Goldman Sachs' latest hedge fund trend monitoring report shows that as of the beginning of the third quarter of 2026, hedge funds' net overweighting of the healthcare, financial, and energy sectors is at or near a ten-year high. Specifically, the net overweighting of the financial sector has risen to its highest level since before the 2008 financial crisis, while the net overweighting of the energy sector has reached a new high since 2015.

Meanwhile, the momentum reversal in AI trading in July triggered one of the most dramatic hedge fund deleveraging waves in nearly a decade, with hedge fund VIP holdings underperforming the S&P 500 equal-weighted index by 11 percentage points in a single month, marking the worst performance in over 20 years.

This round of portfolio rebalancing carries a direct market signal for investors. Historical data shows that hedge fund "rising stars"—those receiving the most new holdings—often outperform their peers in subsequent quarters, while "falling stars" that experience large-scale selling tend to underperform. The current systemic increase in holdings in the healthcare, financial, and energy sectors may indicate that relative return opportunities in these areas are accumulating.

AI-driven trading volatility severely impacted hedge funds, with July becoming a watershed moment.

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

This year, hedge fund performance has been highly correlated with the ups and downs of AI trading. According to Goldman Sachs Prime Services estimates, US equity long-short hedge funds have achieved a cumulative return of 10% from the beginning of the year to August 19th. They performed strongly in the second quarter, particularly in June, but weakened sharply in July as AI momentum reversed.

The pullback in July was particularly severe. Goldman Sachs' VIP portfolio (GSTHHVIP) underperformed the S&P 500 equal-weighted index by 11 percentage points in the single month from the end of June to the end of July, marking its worst monthly relative performance in over 20 years, even surpassing the -9 percentage point drop during the financial crisis in October 2008. Meanwhile, hedge fund total leverage and net leverage both fell sharply from their historical highs in the second quarter, but remain relatively high compared to longer-term historical averages.

It is worth noting that the year-to-date excess returns of the VIP holding basket have a correlation coefficient of 0.9 with Goldman Sachs' AI basket, which means that any changes in AI trading will directly affect the overall performance of the hedge fund.

The company remained "all in AI" in the second quarter, but signs of internal divergence were already emerging.

While hedge funds as a whole remained heavily invested in AI in the second quarter, significant structural divergence emerged within the sector. The report shows that hedge fund portfolio turnover rose to its highest level since 2021 in the second quarter, with turnover within the information technology sector reaching a new high since 2011, reflecting large-scale portfolio restructuring by fund managers within the AI theme.

In terms of specific portfolio changes, hedge funds reduced their holdings in most large-cap tech stocks in the second quarter, with the exceptions of Amazon and Microsoft—both of which saw net increases in holdings. META, on the other hand, joined the ranks of "star stocks that have fallen," with the largest decrease in the number of funds holding it. Nvidia's holdings remained relatively stable, but AI-related stocks, including several semiconductor stocks, experienced large-scale net reductions, even though these stocks were still in an upward trend during the same period.

Among AI-related stocks, those that saw the largest net increases in holdings by hedge funds include Advanced Energy Industries, Viawei Systems Services, and Digital REIT, while those that experienced the largest net reductions include semiconductor and equipment stocks such as Applied Materials, Micron, and Lam Research.

Healthcare, Finance, and Energy: These three sectors are poised for a decade-long period of increased holdings.

The reallocation of funds at the sector level is one of the most crucial signals in this report.

The healthcare sector became the largest sector in terms of net exposure for hedge funds, accounting for 19% of total net exposure. This represents an overweight position of 962 basis points relative to the Russell 3000 index, near a ten-year high. The increase in holdings was broad, with biotechnology being the most heavily invested sub-sector, with managed care being the only exception. AXSM was among the "star rising stocks" of the quarter, while TMO newly joined the VIP holdings list. Among healthcare-specific funds, the most popular holdings were concentrated in the biotechnology sector, with BSX and UNH being exceptions in non-biotechnology areas.

Net overweighting in the financial sector rose to its highest level since before the financial crisis, with relatively balanced increases across sub-sectors. Among financial special funds, regional banks were the most concentrated holding, with COFs being one of the most popular holdings and also a member of the VIP list. CME and ICE saw the largest net increases in the number of hedge fund holders last quarter.

The net overweight position in the energy sector has risen to its highest level since 2015, also showing a broad-based increase across sub-sectors.

In contrast, while the information technology sector remains the largest sector in the long portfolio (accounting for 25%), its net exposure is only 15%, a record "underweight" relative to the Russell 3000 index's 33% weighting. However, this mainly reflects the sector's excessive weighting in the benchmark index, rather than hedge funds actively avoiding technology stocks.

Leverage and Short Selling: Risk Exposure Remains at Historically High Levels

Despite volatility in AI trading, large-cap tech companies remain the most popular long positions held by hedge funds. AMZN has topped its VIP list for the 11th consecutive quarter, with large-cap tech stocks occupying nine of the top ten spots. Historically, the VIP holdings 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%, primarily due to the AI pullback in July.

Despite a significant pullback from their peak, hedge funds' overall risk exposure remains high. Goldman Sachs Prime Services data shows that the total leverage ratio of fundamental long/short funds is at the 73rd percentile of their five-year history, while the net leverage ratio is at the 38th percentile.

On the short side, leveraged funds hold near-record net short positions in Nasdaq 100 futures, with short positions increasing by 35% since mid-June. While the median short rate for S&P 500 stocks has slightly declined 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 short positions accounted for 62% of hedge fund ETF exposure, indicating that funds are using ETFs more as hedging tools than for directional investment.