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Hedge Fund 1st Quarter Analysis: Everyone is Selling Software and Buying Chips

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Hedge Fund Net Leverage Soars to Five-Year 85th Percentile, While Mutual Funds Hoard Cash; "Big Seven" Sweep Hedge Fund VIP List, Yet Face Collective Underweighting by Mutual Funds.

Original Article Title: "Hedge Fund Analysis for the First Quarter: Everyone is Selling Software and Buying Chips"
Original Article Author: Zhao Ying, Wall Street View

In the first quarter, U.S. hedge funds and large mutual funds reached a rare consensus: selling off software and pouring into semiconductors, pushing the semiconductor long positions to a historical high.

According to Goldman Sachs' latest reports on "Hedge Fund Trend Monitoring" and "Mutual Fund Fundamentals," this analysis covers 1059 hedge funds (total equity holdings of $4.6 trillion) and 509 large active mutual funds (equity assets of $3.9 trillion).

The reports show that hedge funds have achieved a 7% return year-to-date, while only 30% of large mutual funds have outperformed the benchmark, below the historical average of 37% since 2007.

The U.S. first quarter 13F filing data reveals a clear market consensus: hedge funds and mutual funds are simultaneously selling off software stocks and moving into the semiconductor sector. The magnitude of this rotation has pushed the weight of semiconductors in hedge fund long portfolios to a historical high.

In terms of positioning, hedge fund net leverage has risen to the 85th percentile over the past five years, near a one-year high. At the same time, the average short interest of S&P 500 constituents has risen to 3% of market cap, the highest level since 2011, indicating a simultaneous escalation of market long and short plays.

Semiconductor Positioning at Record High, Systematic Reduction in Software Holdings

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

Goldman Sachs data shows that the weight of semiconductors in hedge fund long portfolios has reached an all-time high, while the weight of software has fallen to the lowest level since 2019. On the mutual fund side, software holdings have dropped to the lowest level since 2012, and excluding Microsoft, the mutual fund's overweight position in semiconductors relative to software is also the largest since 2012.

At the individual stock level, Microsoft (MSFT) became one of the largest net sellers for both hedge funds and mutual funds last quarter. Mutual funds have also significantly reduced their holdings in the other "Big Seven" members. While hedge funds reduced their positions in most of the "Big Seven," they increased their net holdings in META and AAPL.

Regarding semiconductor stocks, hedge funds increased their holdings in LRCX, AMAT, and ASML; mutual funds increased their holdings in INTC and SITM.

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

In the face of escalating geopolitical tensions in the first quarter, two types of institutions displayed significantly different strategies.

Hedge funds initially reduced net leverage, but subsequently, as the market rebounded in the second quarter, they swiftly increased their positions, with the net exposure rising to near a year-high level. The total leverage ratio remains relatively high compared to historical levels.

Mutual funds, on the other hand, chose to increase their cash holdings, raising the cash as a percentage of assets from a historical low of 1.1% at the beginning of 2026 to 1.4% in early April.

Nevertheless, this level is still relatively low historically, indicating that mutual funds overall have not substantially exited the equity market.

Sector Consensus and Divergence: Industrial Overweight, Technology Divergence

In terms of sector allocation, there is a high consensus between the two types of institutions, but there are also clear exceptions. Hedge funds and mutual funds are both overweight in the industrial sector and underweight in the information technology sector, but their repositioning directions are completely opposite.

In the first quarter, hedge funds increased the net tilt towards information technology by 853 basis points, marking the largest single-quarter change for this sector on record, while decreasing the net tilt towards the industrial sector by 297 basis points.

Mutual funds, on the other hand, engaged in the opposite actions, increasing their industrial exposure by 24 basis points and reducing information technology by 20 basis points.

The two sectors with the most pronounced differences are financials and non-essential consumer goods: mutual funds are overweight in financials while hedge funds are underweight, and hedge funds are overweight in non-essential consumer goods while mutual funds are underweight.

Four "Common Favorites" Outperforming the Market Year-to-Date

Goldman Sachs identified four stocks this quarter that appeared simultaneously on the hedge fund VIP list (GSTHHVIP) and mutual funds' overweight list (GSTHMFOW) – the "Common Favorites": Boeing (BA), Mastercard (MA), Marvell Technology (MRVL), and Visa (V). MRVL is a newcomer this quarter, while Citigroup (C) and Vertiv (VRT) exited the list.

These four stocks have delivered a return of 10% year-to-date, outperforming the equally weighted S&P 500 Index by 3 percentage points.

Looking at a longer time frame, since 2013, the "Common Favorites" portfolio has had an annualized return of 16%, but with a high standard deviation of 22%, indicating significant volatility. The median PE ratio of stocks in this portfolio is 34 times, a significant premium compared to the median PE of 18 times for the S&P 500.

It is worth noting that all the "Seven Giants" are included in the hedge fund VIP list but are simultaneously underweight by mutual funds, showcasing a stark contrast in the two institutions' stance on this core asset.