If you’re wondering what’s happening to the AI trade, it hasn’t dissipated; it’s just shifted.
At the start of the second quarter, hedge funds were still clutching onto most of the blue-chip Magnificent Seven. Besides Tesla, all the stocks remained high on Goldman Sachs’ Very Important Positions (VIP) list of top hedge fund holdings, according to a May 21 note.
But beneath the surface, there’s an acknowledgment that it’s time to look for other outperformers after Big Tech’s incredible run. As hedge funds search for excess returns, they’ve broadened their exposure by shaving off positions in Google, Amazon, Microsoft, Meta, and even AI darling Nvidia. The note, led by Ben Snider, points out that cash has been moving into other AI beneficiaries, such as the sectors that support the technology’s development through infrastructure or software that enables its use in applications.
The rotation has been working out. So far this year, equity long/short hedge funds have returned a “solid” 8%, Snider said. Also, Goldman’s VIP basket of hedge fund stocks has returned 16% year-to-date, outperforming the S&P 500’s 12% rise. This basket has beaten the S&P 500 in 60% of quarters since 2001.
Following hedge funds’ lead may be a good strategy if you’re not a savvy stock picker. The note points to historical data from Goldman’s Hedge Fund Trend Monitor that shows stocks favored by hedge funds tend to outperform other names within their sector in the quarters that followed. The same is true in reverse: when they dump stocks, they tend to underperform shortly after.
Below are the top 10 AI plays pulled from Goldman’s VIP list. The investment bank pulled from 13F filings as of May 15. The funds had $2.7 trillion in gross equity positions as of the start of Q2.
