Hedge funds pared back their exposure to the ‘Magnificent Seven’ tech megacaps to the lowest level in two years last week, signalling a sharp tactical retreat ahead of a high-stakes earnings season, according to a report by Reuters citing a client note from Morgan Stanley.
Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta, and Tesla accounted for more than 60% of the total dollar value sold by hedge funds between Monday and Wednesday last week, suggesting that many fund managers are rotating out of these names, concerned about softening fundamentals or stretched valuations heading into Q1 results.
Tesla is set to report on 22 April, with Alphabet following two days later. All seven stocks are underperforming the S&P 500 year-to-date, with Alphabet down 22% and Tesla off 44%, according to the note.
For long-short equity hedge funds, the shift represents a major sentiment recalibration. The ‘Mag Seven’ trade had become synonymous with 2023’s AI-driven equity rally, and many of the largest funds had built substantial long exposure. But now, positioning appears to be unwinding, driven by a combination of earnings risk, disappointing price action, and broader portfolio diversification.
Bank of America’s latest global fund manager survey also reflects the shift. While nearly 60% of investors previously flagged the Magnificent Seven as the most crowded trade, that figure has fallen to 24%. Gold, now considered the top trade by 49% of respondents, has emerged as the new consensus play.
Beyond tech, hedge funds also trimmed positions across several sectors last week, including healthcare insurance, biotech, aerospace and defence, and consumer discretionary stocks including hotels and restaurants, according to Morgan Stanley.
For hedge fund allocators, the trend suggests a growing appetite for risk management over concentration, particularly in megacap growth. As the earnings season unfolds, managers appear focused on protecting performance and reallocating capital toward more idiosyncratic or defensive opportunities – especially amid elevated macro uncertainty and rising geopolitical tensions.
