- Hedge funds bought equities for a second straight week, with long buying outpacing short sales.
- The reversal came after a late-July AI-linked selloff, when funds cut risk and ended July down 0.8%.
- Traders now watch if the materials short-covering surge and long buying signal a real risk-on rotation.
Hedge funds are shifting back into global equities after sharply cutting risk in late July, with long buying exceeding short sales by a 1.4-to-1 ratio. Gross trading activity rose at the fastest pace in seven weeks, while single-stock positioning has turned net positive and materials are seeing heavy demand.
Hedge Funds Return to Equities
According to the latest Goldman Sachs prime brokerage data, hedge funds have shifted decisively back into global equities. They purchased shares for a second consecutive week through the period ending last Thursday. Gross trading volume surged at its fastest pace in seven weeks, as long-purchasing exceeded short selling by a margin of 1.4 to 1.
Meanwhile, single-stock positions saw net buying for the first time in a month, largely based on fresh long exposure and not just defensive covering of short sellers. Buying was particularly strong in emerging markets and Asia, outpacing activity in other major regions.
Late-July AI Selloff Triggers Aggressive De-Risking
In late July 2026, AI stocks saw a sudden shift in sentiment, leading to a rapid de-risking by hedge funds. Semiconductor, memory, and AI infrastructure stocks sold off hard as investors questioned massive corporate AI capital expenditure and its returns. South Korean chipmakers were at the epicenter, the Kospi dropping more than 10% as major chip stocks lost more than $1 trillion.
The selloff quickly spread through hedge-fund portfolios. Managers reduced their U.S. technology exposure by the most on record in some measures, as overall market-value exposure dropped about 10% since early June, according to Goldman Sachs prime brokerage data. High Beta AI momentum stocks plunged 30-40% from highs, and funds were net sellers for several consecutive weeks.
The losses were especially heavy for Asia-focused equity long/short funds with average losses approaching 18-19% through late July. PivotalPath’s TMT hedge fund index declined by approximately 10% in July, compared with approximately 0.8% for the general industry. Situational Awareness had a roughly 67% drop on margin calls and was forced to liquidate most of its public equity portfolio, as did Whale Rock Capital, which dropped 21.7%, and Altimeter Capital, which dropped around 11%.
What’s Next for Risk-On Positioning and Market Rotation
Traders now watch to see if the July move is a risk-on move or a short-covering move. In nearly two years, materials posted the strongest demand and the most intense short-covering wave, and financials and communication services were among the best. Eight of 11 global sectors saw net purchases, though traders should monitor to see if these buying interests continue once short positions are reduced.
Breadth and positioning will be crucial. A sustainable rotation would likely be characterized as continued inflows across cyclical sectors, robust equal-weighted indices, and continued buying, not just covering of positions. Leverage has already eased off from its extreme levels in the AI complex, and corporate buybacks may offer a boost as earnings blackout periods end in mid-August. Elevated stock-level dispersion should also create opportunities for selective stock-picking.
Furthermore, AI Fundamentals will provide another test. Traders should pay attention to earnings, corporate capital-expenditure plans and signs of monetization, especially in the memory, power and AI infrastructure areas. A positive environment is that nearly half of large investors intend to boost exposure to hedge funds in the second half of 2026. However, renewed worries about AI earnings, excess leverage, policy risks, or a fading breadth could soon prove the July rally to be temporary.
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