Article 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 buying semiconductors, pushing the overweight position in semiconductors to an all-time high.
According to Goldman Sachs' latest reports, "Hedge Fund Trend Monitor" and "Mutual Fund Fundamentals," this analysis covers 1,059 hedge funds (with a total stock holding of $4.6 trillion) and 509 large active mutual funds (with stock assets under management of $3.9 trillion). The reports show that hedge funds have returned 7% year-to-date, while only 30% of large mutual funds outperformed their benchmarks, below the historical average of 37% since 2007.
Q1 U.S. 13F holdings data reveal a clear market consensus: hedge funds and mutual funds are simultaneously selling software stocks and shifting into the semiconductor sector, with this rotation so substantial that semiconductors now represent their highest-ever weighting in hedge fund long portfolios.
In terms of position structure, hedge fund net leverage has risen to the 85th percentile over the past five years, reaching its highest level in nearly a year; at the same time, the average short interest ratio among S&P 500 constituents has increased to 3% of market capitalization, the highest level since 2011, indicating a simultaneous intensification of bullish and bearish market pressures.
Semiconductor positions have reached record highs, while software has faced systematic selling.
The internal structural rotation within the technology sector was the most prominent theme this quarter.
According to Goldman Sachs data, the weighting of semiconductors in hedge fund long portfolios has risen to the highest level on record, while the weighting of software has fallen to the lowest level since 2019. Among mutual funds, software holdings have dropped to their lowest level since 2012; excluding Microsoft, mutual funds’ overweight position in semiconductors relative to software is also the largest since 2012.
At the individual stock level, Microsoft (MSFT) was one of the stocks with the largest net reductions by hedge funds and mutual funds last quarter. Mutual funds also reduced their holdings across all other members of the "Magnificent Seven." While hedge funds trimmed positions in most of the "Magnificent Seven," they achieved net increases in META and AAPL.
In the semiconductor sector, hedge funds net increased their positions in LRCX, AMAT, and ASML, while mutual funds net increased their positions in INTC and SITM.
Leverage vs. Cash: Hedge Funds Are Aggressive, Mutual Funds Are Conservative
In response to escalating geopolitical tensions in the first quarter, the two types of institutions adopted markedly different strategies.
Hedge funds initially reduced their net leverage, but quickly increased positions as markets rebounded in the second quarter, causing net exposure to rise to nearly a one-year high; overall leverage remains relatively elevated compared to historical levels.
Mutual funds opted to increase their cash allocation, raising the cash-to-asset ratio from a historical low of 1.1% at the beginning of 2026 to 1.4% by early April. Nevertheless, this level remains extremely low by historical standards, indicating that mutual funds as a whole have not significantly withdrawn from equity markets.
Sector Consensus and Divergence: Overweight on Industrials, Divergence in Technology
In terms of sector allocation, there is strong consensus between the two types of institutions, but with notable exceptions. Both hedge funds and mutual funds overweight the industrial sector and underweight the information technology sector, yet their positioning adjustments are fundamentally opposite.
Hedge funds increased their net exposure to information technology by 853 basis points in the first quarter, the largest single-quarter change on record for the sector, while reducing their net exposure to industrials by 297 basis points. Mutual funds took the opposite approach, increasing their exposure to industrials by 24 basis points and reducing their exposure to information technology by 20 basis points.
The two sectors with the most pronounced divergence are financials and discretionary consumer goods: mutual funds are overweight in financials but underweight in discretionary consumer goods, while hedge funds are overweight in discretionary consumer goods but underweight in financials.
Four "shared favorites" have outperformed the market this year.
This quarter, Goldman Sachs identified four stocks that appear on both the hedge fund VIP list (GSTHHVIP) and the mutual fund overweight list (GSTHMFOW) as "shared favorites": Boeing (BA), Mastercard (MA), Marvell Technology (MRVL), and Visa (V). MRVL is a new addition this quarter, while Citigroup (C) and Vertiv (VRT) have been removed from the list.
These four stocks have returned 10% year-to-date, outperforming the equal-weight S&P 500 index by 3 percentage points. Over a longer horizon, since 2013, the "Mutual Favorite" portfolio has delivered an annualized return of 16%, but with a standard deviation of 22%, indicating significantly higher volatility. The median P/E ratio of stocks in the current portfolio is 34, a substantial premium compared to the S&P 500’s median P/E of 18.
Notably, all seven giants are included on hedge fund VIP lists, yet simultaneously underweighted by mutual funds, highlighting a stark contrast in sentiment toward this core asset between the two types of institutions.