Hedge funds are pulling back from AI at the fastest pace on record: Hedge funds have moved underweight the broader AI trade for the first time since early 2023, according to Morgan Stanley data. This comes as hedge funds have reduced their combined long and short exposure to global equities by -8% since June, marking the largest sustained period of position reduction on record. Hedge funds cut exposure most heavily to Hyperscalers, Energy, Materials and Real Estate, with ~35%-40% of long/short hedge funds now delivering flat or negative returns year-to-date. Meanwhile, 6-month correlations between S&P 500 stocks have fallen below 10%, marking a record low, and showing how independently individual stocks within the index move. The market's growing disconnect was evident on Thursday, when the S&P 500 finished lower despite more than 80% of its constituents finishing higher, the first such session in nearly 40 years of data. Hedge funds have cut exposure at a record pace, but more selling could still lie ahead.