Author: Zhao Ying
Source: Wall Street News
In the first quarter, U.S. hedge funds and large mutual funds reached a rare consensus: selling software and rushing into semiconductors, pushing the long-side weight of semiconductors in hedge fund portfolios to a record high.
According to Goldman Sachs' latest "Hedge Fund Trend Monitor" and "Mutual Fund Fundamentals" reports, this analysis covers 1,059 hedge funds (total equity holdings of $4.6 trillion) and 509 large active mutual funds (equity assets under management of $3.9 trillion). The reports show that hedge funds have achieved a return of 7% year-to-date, while only 30% of large mutual funds outperformed their benchmarks, lower than the historical average of 37% since 2007.
The Q1 13F filing data from the U.S. reveals a clear market consensus: hedge funds and mutual funds are simultaneously selling software stocks and flocking to the semiconductor sector. The intensity of this rotation is so great that it has pushed semiconductors' weight in hedge fund long portfolios to an all-time high.
In terms of positioning structure, hedge fund net leverage has rebounded to the 85th percentile over the past five years, near a one-year high; meanwhile, the average short interest as a percentage of market capitalization for S&P 500 constituents has risen to 3%, the highest level since 2011, indicating simultaneous intensification of market long/short activity.
Semiconductor Positioning Hits Record High, Software Faces Systematic Reduction
The structural rotation within the technology sector was the most prominent theme this quarter.
Goldman Sachs data shows that semiconductors' weight in hedge fund long portfolios has risen to its highest level on record, while software's weight has fallen to its lowest since 2019. Regarding mutual funds, their positioning in software has dropped to its lowest level since 2012. Excluding Microsoft, the magnitude of mutual fund overweight in semiconductors relative to software is also the largest since 2012.
At the individual stock level, Microsoft (MSFT) became one of the stocks with the largest net selling by both hedge funds and mutual funds last quarter. Mutual funds also reduced holdings across the remaining members of the "Magnificent Seven." While hedge funds trimmed most "Magnificent Seven" holdings, they achieved net buying in META and AAPL.
For semiconductor stocks, hedge funds net bought LRCX, AMAT, and ASML; mutual funds net bought INTC and SITM.
Leverage and Cash: Hedge Funds Aggressive, Mutual Funds Conservative
Faced with escalating geopolitical tensions in Q1, the response strategies of the two types of institutions showed clear divergence.
Hedge funds initially cut net leverage but then quickly increased positions as markets rebounded in Q2, with net exposure rebounding to near a one-year high. Overall leverage relative to historical levels remains elevated.
Mutual funds, on the other hand, opted to increase cash allocations, raising the cash-to-assets ratio from a historical low of 1.1% at the start of 2026 to 1.4% in early April. However, this level remains historically very low, indicating that mutual funds overall have not significantly withdrawn from equity markets.
Sector Consensus and Divergence: Overweight Industrials, Tech Divergence
Regarding sector allocations, there is high consensus between the two types of institutions, but also clear exceptions. Both hedge funds and mutual funds are overweight the Industrials sector and underweight the Information Technology sector, but their reallocation directions were opposite.
Hedge funds increased their net tilt towards Information Technology by 853 basis points in Q1, the largest single-quarter move for the sector on record, while simultaneously reducing their net tilt towards Industrials by 297 basis points. Mutual funds operated in reverse, increasing Industrials exposure by 24 basis points and cutting Information Technology by 20 basis points.
The two sectors with the most prominent divergence are Financials and Consumer Discretionary: mutual funds are overweight Financials while hedge funds are underweight; hedge funds are overweight Consumer Discretionary while mutual funds are underweight.
Four 'Shared Favorites' Outperform the Market Year-to-Date
Goldman Sachs screened for four stocks appearing simultaneously on both the hedge fund VIP list (GSTHHVIP) and the mutual fund overweight list (GSTHMFOW) this quarter: Boeing (BA), Mastercard (MA), Marvell Technology (MRVL), and Visa (V). MRVL is a new member this quarter, while Citigroup (C) and Vertiv (VRT) exited the list.
These four stocks have generated a year-to-date return of 10%, outperforming the equal-weighted S&P 500 index by 3 percentage points. Over a longer horizon, since 2013, the "Shared Favorites" basket has an annualized return of 16%, but with a high standard deviation of 22%, indicating significantly higher volatility. Currently, the median stock in this basket trades at a P/E of 34x, a significant premium to the S&P 500 median stock's 18x.
Notably, all "Magnificent Seven" stocks are included in the hedge fund VIP list, yet all are underweighted by mutual funds, forming a sharp contrast in attitudes between the two types of institutions towards these core assets.
