Hedge Funds Are On an Equities Shopping Spree

Punxsutawney Phil may see six more weeks of winter, but hedge funds aren’t waiting to emerge from their bearish slumber. 

After over a month of straight selling, hedge funds last week emerged as major buyers of US equities, according to a Goldman Sachs’ report published Monday. In fact, hedge funds are now in the midst of one of their hottest buying streaks in years. What gives?

Over the Hedge

There’s no shortage these days of headwinds facing US equities. The early days of Trump 2.0 haven’t exactly been, shall we say, predictable. Meanwhile, DeepSeek’s emergence in January appeared to undercut the entire AI narrative served up by the very same massive tech firms that have fueled broader market gains the past two years. In January, hedge funds sold equities in virtually every sector and geographic region excluding real estate stocks, Goldman noted earlier this month, while heavily shorting US industrial stocks.

But last week’s unexpectedly strong batch of earnings reports has created a counter-narrative, particularly in tech, where Goldman says hedge funds are now seemingly back to being all in. In other words, they’re buying the DeepSeek dip:

• Following five straight weeks of net selling, Goldman says hedge funds last week bought equities at their fastest pace since November. Last week also marked the heaviest net buying of single stocks in over three years.
• The week also marked hedge funds’ second-largest buying spree in the past five years of information services sector equities, led by semiconductor and software stocks in particular.

The moves “suggests that hedge funds became more constructive on and started leaning into the AI theme following the DeepSeek-induced selloff on Jan 27th,” Vincent Lin, Goldman’s co-head of prime insights and analytics, wrote in a note to clients.

Goldman Touch: That AI theme may well exclude the Big Tech names that investors are used to hearing. In fact, Goldman Sachs also noted on Monday that in earnings calls last week, zero of the six Magnificent Seven companies that have reported so far announced a positive sales surprise. If Nvidia doesn’t surprise when it reports later this month, it’d mark the first time the block has gone without a positive sales surprise since 2022. It’s why Goldman keeps recommending investors shift from “Phase 2” AI stocks — a.k.a., the mostly Big Tech firms that offer AI hardware and platforms — into “Phase 3” AI stocks, or those that can create incremental revenue from selling software and IT tools. Maybe small and mid tech is due for a renaissance after all.