Hedge funds scaled back their exposure to the “Magnificent Seven” mega-cap US tech stocks in Q1 while rotating into US-listed Chinese equities, according to Bloomberg report citing new research by the prime brokerage team at Goldman Sachs.
The shift underscores a tactical pivot toward undervalued tech names amid concerns over stretched US valuations and growing interest in China’s AI resurgence.
Goldman’s analysis, based on filings from 684 hedge funds overseeing $3.1tn in gross equity exposure, found that Chinese ADRs such as Alibaba, PDD Holdings, and Baidu were among the most aggressively accumulated positions last quarter. This move came despite escalating US-China trade tensions – a backdrop that would typically temper foreign inflows.
Strategists led by Ben Snider attributed the increased hedge fund appetite to improving sentiment around China’s tech capabilities, particularly after the early 2025 breakout of local AI startup DeepSeek, which rattled global markets and recalibrated perceptions of China’s innovation edge. Chinese tech firms also continue to trade at steep discounts relative to their US peers, with Alibaba’s forward P/E at 13 and PDD’s below 10 — far cheaper than most of the US tech giants, save for Alphabet, which sits just under 20.
Despite the rotation, core US megacaps like Amazon, Meta, Microsoft, Nvidia, and Alphabet remain among the top long positions in hedge fund portfolios, suggesting that while diversification is increasing, there’s no wholesale abandonment of high-growth US tech.
Notably, Goldman flagged that the timing of the China pivot may prove suboptimal. The Magnificent Seven have staged a strong rebound in Q2, returning over 10% so far, while renewed trade war rhetoric has begun to weigh on Chinese ADR performance.
Alongside these positioning shifts, hedge fund gross leverage has reached a new record, driven by a notable pickup in short activity. Median short interest across S&P 500 names rose to 2.3% of float, up from 1.8% in December — marking the first time since 2021 that shorting activity has breached historical averages.
The increased gross leverage reflects broader investor willingness to express higher-conviction views – both long and short – amid an increasingly bifurcated equity landscape and persistent volatility in macro signals.
