Technology-focused hedge funds suffered their steepest monthly decline since the global financial crisis in July as a sharp reversal in AI-related equities hit managers concentrated in the sector, according to a the latest data from HFR.
The HFRI Technology Index fell 7.0% during the month, marking its worst performance since January 2008, according to HFR. The decline helped drag the broader hedge fund industry into its first monthly loss since March.
The HFRI Fund Weighted Composite Index fell 1.1% in July, reducing its gain for the year to 6.2%. The decline followed a particularly strong second quarter, when the index gained 6.4% — its strongest quarterly performance since the fourth quarter of 2020.
Equity hedge and event-driven strategies were among the biggest casualties of the July selloff, with technology and growth exposures particularly vulnerable as investor sentiment towards AI-related stocks deteriorated.
“Hedge funds navigated an extremely intense and volatile trading environment in July,” said Kenneth J Heinz, president of HFR. He said negative technology momentum had contributed to the largest monthly decline for technology hedge funds since 2008.
Heinz also pointed to an increasingly complicated backdrop for managers, citing uncertainty around AI valuations and expectations, geopolitical tensions, supply-chain pressures, interest rates and political developments.
The HFRI Equity Hedge Index fell 1.85% in July, with technology-focused strategies accounting for much of the damage.
The HFRI EH: Technology Index plunged 7.0%, while the HFRI EH: Fundamental Growth Index declined 4.2%.
Value-oriented managers fared considerably better. The HFRI EH: Fundamental Value Index gained an estimated 0.5% during the month, highlighting the growing performance gap between different equity strategies.
The deterioration in AI-related stocks has already exposed the risks facing hedge funds that had built concentrated positions around the technology theme. July’s performance suggests that managers with greater diversification or less exposure to crowded growth trades were better positioned to absorb the reversal.
Event-driven strategies recorded a 1.77% decline in July, according to HFR.
Special situations strategies fell 3.9%, while the event-driven multi-strategy index lost 3.0%. Activist strategies provided a partial offset, gaining an estimated 1.0%.
The broader market volatility also produced mixed results across macro and relative-value strategies.
The HFRI Relative Value Index gained 0.2%, with yield alternatives returning 2.1% and fixed-income multi-strategy managers gaining 0.7%. Sovereign fixed-income relative-value strategies fell 1.6% as bond yields increased while the Federal Reserve left interest rates unchanged.
Macro strategies declined 0.3%. Commodity-focused managers gained 2.2% as geopolitical tensions and rising oil prices created opportunities, while systematic diversified/CTA and discretionary thematic strategies each fell 0.9%.
The HFR Cryptocurrency Index gained an estimated 2.4%, while the multi-manager or “pod shop” index declined 0.4%.
The difficult month for hedge funds was accompanied by a significant increase in performance dispersion.
The top 10% of funds in the HFRI Fund Weighted Composite Index gained an average 7.6% in July, while the bottom 10% lost an average 12.5%. That produced a 20.1 percentage-point gap between the strongest and weakest performers, compared with 16.7 points in June.
The dispersion is even more pronounced over the past year. During the 12 months through July, the top decile of funds gained 70.9%, while the bottom decile lost 8.2%, creating a 79.1 percentage-point performance gap.
Only about 45% of hedge funds generated positive returns in July.
The figures underline how sharply hedge fund performance is diverging as managers navigate a market increasingly shaped by AI-related positioning, geopolitical shocks, commodity volatility and changing expectations for interest rates.
