The most popular long positions among hedge funds have fallen roughly 40% from their recent peaks, marking the sharpest drawdown in momentum factor baskets in five years. The short side of the ledger offered no refuge either, as volatile whipsaws wiped out gains on positions that had been intended to hedge the downside. For long-short funds, which profit from the spread between winning longs and losing shorts, moves that hit both books at once are among the most damaging setups the strategy can face.

Goldman Sachs' closely watched Hedge Fund VIP list, which tracks the stocks most commonly found in institutional long books, posted its worst one-month underperformance relative to the S&P 500 in over 20 years. The list is compiled from quarterly 13F filings, aggregating the stocks that appear most often among hedge funds' top long positions, and has historically outperformed the S&P 500 — making a miss of this scale unusual even by the basket's own standards. The episode played out in July 2026, when a violent de-grossing episode forced funds to dump the AI and semiconductor names that had driven strong performance just months earlier.

AI and semiconductor exposure unwinds

During July's unwind, hedge funds sharply reduced their technology exposure, particularly in semiconductors, memory stocks, and AI infrastructure names. Long trimming and short covering happened simultaneously, creating chaotic price action in widely held positions. That simultaneous action is the essence of de-grossing: cutting gross exposure — the sum of long and short positions — by shrinking both sides of the book at once. Because so many funds held the same handful of AI-linked names, the rush to reduce risk concentrated selling in exactly the positions that were hardest to exit without moving prices.

Situational Awareness LP

No single fund illustrates the damage quite like Situational Awareness LP, the vehicle managed by Leopold Aschenbrenner, a former OpenAI researcher who parlayed his AI expertise into a hedge fund career; his widely read 2024 essay 'Situational Awareness,' on the race toward artificial general intelligence, shares the fund's name. The fund lost approximately 67% in July alone. That is not a gradual decline: it is a fund going from roughly $45 billion in assets under management to about $10 billion in a single month.

The mechanics of the collapse were severe. As losses mounted, major prime brokers, including Goldman Sachs and JPMorgan, issued margin calls — demands for cash or collateral when the value of pledged positions falls, which can leave a fund with no option but to sell into a falling market. To meet those demands, Situational Awareness LP sold most of its public equity stakes, including holdings in Micron and SK Hynix, to Citadel at a discounted rate, the kind of forced transfer to better-capitalized buyers that has recurred in past deleveraging episodes.

Broader losses and reduced leverage

Equity long-short funds and multi-strategy vehicles across the industry recorded significant losses during the July episode. Despite those losses, US equity long-short strategies remained positive on the year, returning approximately 10% through mid-August 2026, indicating that the drawdown, however violent, hit strategies carrying accumulated gains rather than starting from scratch.

The episode also triggered a meaningful reduction in leverage and AI-related exposure across the industry. Hedge funds pulled gross and net positioning back from prior peaks, effectively resetting risk budgets after a period of excessive concentration.

The Goldman Sachs VIP list has reached four-year lows, suggesting the popular hedge fund trade basket is now more washed out than at any point since mid-2022. How durable that reset proves will be visible in the standard public record: prime brokerage positioning reports and the next round of quarterly 13F filings, which will show how hedge fund exposure to AI and semiconductor names actually stood after July.

Source: CryptoBriefing