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Hedge Funds Suffer Losses as AI Trade Reverses, Goldman Sachs Reports
A sharp reversal in the high-flying artificial intelligence and momentum trade since late June has dealt a blow to hedge fund returns, with systematic strategies absorbing the most significant losses, according to a report from Goldman Sachs' Prime desk.
Systematic Funds Bear the Brunt
Systematic managers experienced the brunt of the downturn, falling 3.6% since June 22 in what Goldman Sachs described as their worst drawdown since the summer of 2025. The losses erased approximately a quarter of their gains for the year.
According to the bank's analysis, this cohort's year-to-date performance has been reduced to 10.8%, down from a high of 14.4% recorded on June 22. The damage was reportedly concentrated on the short side of portfolios, led by U.S. equities, with momentum and crowded positioning cited as the primary factors driving the negative performance.
AdFundamental Managers Unwind AI Bets
Fundamental long-short managers fared better in absolute terms but were not immune to the reversal, slipping 2.2% since June 22. These funds remain up 15.5% for the year, according to Goldman Sachs. The bank noted that only 0.8 percentage points of the recent loss was attributable to alpha, with exposure to information technology and momentum stocks responsible for the decline.
In a significant development for market positioning, Goldman Sachs highlighted that fundamental managers are now "aggressively cutting the AI longs that had generated their entire year-to-date alpha through June 22." This unwinding has reportedly stripped momentum exposure from their portfolios and pushed their gross leverage into the bottom decile over the past year, signaling a notable defensive shift.