Hedge funds get humbled

You’ve probably heard of Jane Street, the famously secretive trading firm that makes an absurd amount of money. Last year, it pulled in a record $39.6 billion in trading revenue, which works out to roughly $2.68 million per employee.

But those workers might want to skip the annual new Ferrari and the autumn yacht shopping: Jane Street posted a roughly $15 billion trading loss in July, its first losing month in a decade, after getting caught on the wrong side of Asian equity trades and the collapse of Situational Awareness.

While that sounds catastrophic, the firm has generated more than $40 billion in net trading revenue so far this year even after the loss—already more than it made in all of last year.

The AI unwind

It’s not just Jane Street. In July, hedge funds at large had their worst month relative to the S&P 500 in 20 years after the AI trade suddenly reversed, according to Goldman Sachs.

Many funds had piled into the same semiconductors, hyperscalers, and other AI-linked stocks. When those names sold off, managers rushed to cut exposure and reduce risk, triggering one of the biggest “de-grossing” episodes of the past decade.

The most concentrated funds got hit hardest. Situational Awareness, for example, had 56% of its portfolio tied up in Micron and Sandisk before the stocks fell 24% and 43%, respectively, in July—helping trigger the leveraged fund’s near-collapse.

Still, hedge funds haven’t exactly had a terrible year: They were up about 10% through Aug. 19.

Back to basics

After getting burned by crowded AI bets, you might expect hedge funds to back away from the trade.

But Goldman data shows that nine of the 10 most popular stocks among hedge funds are still megacap tech names, with Visa the lone exception. Amazon remains the most widely held stock for the 11th straight quarter, while names including SpaceX, Snowflake, and Compass have also climbed onto managers’ shopping lists.

That said, the AI trade is starting to change. “Smart money” has been moving away from some of the memory-chip names that dominated earlier in the year and spreading bets across a wider group of companies. Net tilts toward healthcare, financials, and energy have climbed to their highest levels in a decade, with Axsome Therapeutics, Thermo Fisher Scientific, and Capital One among the names gaining favor.

For a group that notoriously employs some of the smartest people on Wall Street, July served up a surprisingly simple lesson: Diversify, diversify, diversify.—SY