The net leverage of hedge funds has soared to the 85th percentile in five years, while mutual funds are hoarding cash in the opposite direction; all "seven giants" are included in the hedge fund VIP list but are collectively underweighted by mutual funds.

Written by: Zhao Ying

Source: Wall Street Journal

In the first quarter, U.S. hedge funds and large mutual funds reached a rare consensus: selling software and rushing into semiconductors, pushing the weight of semiconductor longs to a historical high.

According to the latest reports from Goldman Sachs on "Hedge Fund Trend Monitoring" and "Mutual Fund Fundamentals," this analysis covers 1,059 hedge funds (total stock holdings of $4.6 trillion) and 509 large actively managed mutual funds (stock asset size of $3.9 trillion). The reports show that hedge funds have a return rate of 7% so far this year, while only 30% of large mutual funds outperformed their benchmarks, below the historical average of 37% since 2007.

The 13F holdings data in the U.S. for the first quarter reveals a clear market consensus: hedge funds and mutual funds are simultaneously selling software stocks and flooding into the semiconductor sector, with this rotation resulting in a historical high for semiconductors in hedge fund long portfolios.

In terms of position structure, hedge fund net leverage has rebounded to the 85th percentile of the past five years, at a near one-year high; at the same time, the average short-selling ratio of S&P 500 constituents has risen to 3% of market capitalization, the highest level since 2011, indicating a simultaneous warming of market long-short battles.

Semiconductor Positions Set Historical Records, Software Faces Systematic Reduction

Structural rotation within the technology sector is the most significant theme of this quarter.

Data from Goldman Sachs shows that the weight of semiconductors in hedge fund long portfolios has reached an all-time high, while the weight of software has dropped to the lowest level since 2019. In the case of mutual funds, software positions have fallen to their lowest level since 2012, and excluding Microsoft, the relative overweight of semiconductors to software by mutual funds is also the largest since 2012.

At the individual stock level, Microsoft (MSFT) has become one of the stocks with the largest net reduction by hedge funds and mutual funds in the last quarter. Mutual funds have also broadly reduced their holdings of the other "seven giants." Although hedge funds have reduced their holdings in most of the "seven giants," they have net increased positions in META and AAPL.

In terms of semiconductor stocks, hedge funds have net increased their positions in LRCX, AMAT, and ASML; mutual funds have net increased their positions in INTC and SITM.

Leverage and Cash: Hedge Funds Are Aggressive, Mutual Funds Are Conservative

In response to the heightened geopolitical tensions in the first quarter, the strategies of the two types of institutions have diverged significantly.

Initially, hedge funds reduced their net leverage, but soon increased their positions quickly with the market rebound in the second quarter, bringing net exposure back to a near one-year high, while the total leverage ratio remains relatively high compared to historical levels.

In contrast, mutual funds opted to increase cash allocations, raising the cash proportion of their assets from a historical low of 1.1% at the beginning of 2026 to 1.4% in early April. Nevertheless, this level remains extremely low relative to historical standards, indicating that mutual funds have not significantly withdrawn from the equity market as a whole.

Sector Consensus and Divergence: Overweight Industrials, Divergence in Technology

In sector allocation, there is a high consensus between the two types of institutions, but there are also notable exceptions. Both hedge funds and mutual funds are overweighting the industrial sector while underweighting the information technology sector, but their reallocation directions are completely opposite.

In the first quarter, hedge funds increased their net bias toward information technology by 853 basis points, marking the largest single-quarter change on record, while reducing the net bias toward the industrial sector by 297 basis points. In contrast, mutual funds acted in reverse, increasing their industrial exposure by 24 basis points and reducing information technology by 20 basis points.

The most pronounced divergences in two sectors are financials and discretionary consumer goods: mutual funds are overweight in financials while hedge funds are underweight; hedge funds are overweight in discretionary consumer goods while mutual funds are underweight.

Four "Mutual Favorites" Outperform the Market This Year

Goldman Sachs has selected four stocks that appeared in both the hedge fund VIP list (GSTHHVIP) and the mutual fund overweight list (GSTHMFOW) this quarter as "mutual favorites": Boeing (BA), Mastercard (MA), Marvell Technology (MRVL), and Visa (V). Among them, MRVL is a new member this quarter, while Citigroup (C) and Vertiv (VRT) have exited the list.

These four stocks have achieved a return rate of 10% this year, outperforming the equal-weighted S&P 500 index by 3 percentage points. From a longer perspective, since 2013, the annualized return rate of the "mutual favorites" portfolio is 16%, but the standard deviation is as high as 22%, indicating significantly high volatility. Currently, the median price-to-earnings ratio of stocks in this portfolio is 34 times, significantly higher than the median of 18 times for S&P 500 stocks.

It is noteworthy that all "seven giants" are included in the hedge fund VIP list but are simultaneously underweight by mutual funds, highlighting a stark contrast between the attitudes of the two institutions toward this core asset.