Key Takeaways
- • U.S. long/short equity hedge funds delivered a 10% return through mid-August 2026, but performance masked significant July volatility driven by a sharp reversal in the AI trade that triggered one of the worst one-month underperformances for popular hedge fund positions versus the S&P 500 in over 20 years.
- • Goldman Sachs' Hedge Fund Trend Monitor shows hedge funds achieved strong Q2 returns by concentrating positions in top-performing AI stocks, but these same crowded positions became liabilities in July as momentum reversed, forcing significant de-grossing activity among leveraged funds.
- • Popular hedge fund long positions underperformed the equal-weight S&P 500 by 11 percentage points between late June and late July, coinciding with one of the sharpest de-leveraging cycles in the past decade.
- • Hedge funds are maintaining unusually large short positions in NASDAQ 100 futures at near-record levels and holding elevated short interest in individual stocks, suggesting defensive positioning as gross and net leverage remain above historical averages despite recent declines from Q2 peaks.
Summary
U.S. long/short equity hedge funds posted a 10% year-to-date return through mid-August 2026, demonstrating overall resilience in 2026 despite acute July turbulence. However, this headline figure obscures a sharp reversal in performance driven by the artificial intelligence trade, according to Goldman Sachs' quarterly Hedge Fund Trend Monitor. The disparity between Q2 outperformance and July underperformance underscores the concentration risk that dominated hedge fund positioning through the first half of the year.
During the second quarter, hedge funds achieved robust returns by establishing substantial long positions in the highest-performing AI-related equities. This concentrated bet drove both hedge fund performance and broader market gains, sending hedge fund crowding metrics to record levels. However, the unwinding began in late June and accelerated through July as momentum in these positions reversed sharply. The consequences were severe: Goldman's basket of the most popular long positions among hedge funds experienced its worst single-month underperformance versus the S&P 500 in over two decades, lagging the equal-weight S&P 500 by 11 percentage points between late June and late July.
This July reversal triggered substantial de-grossing activity among hedge funds—one of the sharpest such episodes in the past decade—as managers reduced leverage and exposure to AI-related names. Despite these reductions, gross leverage, net leverage, and AI exposure all remain above longer-term historical averages, indicating that managers have not fully unwound their positions.
Defensively, hedge funds have built unusually large short positions in both NASDAQ 100 index futures and individual stocks. Goldman reports that leveraged funds currently hold near-record short positions in NASDAQ 100 futures. Additionally, short interest in the median S&P 500 stock, while declining modestly since late June, remains near the highest levels recorded in over 15 years. These elevated short positions suggest hedge fund managers are actively hedging against further downside risk while maintaining structural long exposure.
During the second quarter, hedge funds achieved robust returns by establishing substantial long positions in the highest-performing AI-related equities. This concentrated bet drove both hedge fund performance and broader market gains, sending hedge fund crowding metrics to record levels. However, the unwinding began in late June and accelerated through July as momentum in these positions reversed sharply. The consequences were severe: Goldman's basket of the most popular long positions among hedge funds experienced its worst single-month underperformance versus the S&P 500 in over two decades, lagging the equal-weight S&P 500 by 11 percentage points between late June and late July.
This July reversal triggered substantial de-grossing activity among hedge funds—one of the sharpest such episodes in the past decade—as managers reduced leverage and exposure to AI-related names. Despite these reductions, gross leverage, net leverage, and AI exposure all remain above longer-term historical averages, indicating that managers have not fully unwound their positions.
Defensively, hedge funds have built unusually large short positions in both NASDAQ 100 index futures and individual stocks. Goldman reports that leveraged funds currently hold near-record short positions in NASDAQ 100 futures. Additionally, short interest in the median S&P 500 stock, while declining modestly since late June, remains near the highest levels recorded in over 15 years. These elevated short positions suggest hedge fund managers are actively hedging against further downside risk while maintaining structural long exposure.
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