In the first quarter, U.S. hedge funds and large mutual funds reached a rare consensus: selling off software and pouring into semiconductors, pushing the semiconductor long positions to a historical high.
According to Goldman Sachs’ latest reports on “Hedge Fund Trend Monitoring” and “Mutual Fund Fundamentals,” this analysis covers 1059 hedge funds (total equity holdings of $4.6 trillion) and 509 large active mutual funds (equity assets of $3.9 trillion). The reports show that hedge funds have achieved a 7% return year-to-date, while only 30% of large mutual funds have outperformed the benchmark, below the historical average of 37% since 2007.
The U.S. first quarter 13F filing data reveals a clear market consensus: hedge funds and mutual funds are simultaneously selling off software stocks and moving into the semiconductor sector. The magnitude of this rotation has pushed the weight of semiconductors in hedge fund long portfolios to a historical high. In terms of positioning, hedge fund net leverage has risen to the 85th percentile over the past five years, near a one-year high. At the same time, the average short interest of S&P 500 constituents has risen to 3% of market cap, the highest level since 2011, indicating a simultaneous escalation of market long and short plays.
Semiconductor Positioning at Record High, Systematic Reduction in Software Holdings: The most significant theme of this quarter is the structural rotation within the technology sector. Goldman Sachs data shows that the weight of semiconductors in hedge fund long portfolios has reached an all-time high, while the weight of software has fallen to the lowest level since 2019. On the mutual fund side, software holdings have dropped to the lowest level since 2012, and excluding Microsoft, the mutual fund’s overweight position in semiconductors relative to software is also the largest since 2012.
At the individual stock level, Microsoft (MSFT) became one of the largest net sellers for both hedge funds and mutual funds last quarter. Mutual funds have also significantly reduced their holdings in the other “Big Seven” members. While hedge funds reduced their positions in most of the “Big Seven,” they increased their net holdings in META and AAPL. Regarding semiconductor stocks, hedge funds increased their holdings in LRCX, AMAT, and ASML; mutual funds increased their holdings in INTC and SITM.
Leverage and Cash: Hedge Funds Are Aggressive, Mutual Funds Are Conservative: In the face of escalating geopolitical tensions in the first quarter, two types of institutions displayed significantly different strategies. Hedge funds initially reduced net leverage, but subsequently, as the market rebounded in the second quarter, they swiftly increased their positions, with the net exposure rising to near a year-high level. The total leverage ratio remains relatively high compared to historical levels.
Mutual funds, on the other hand, chose to increase their cash holdings, raising the cash as a percentage of assets from a historical low of 1.1% at the beginning of 2026 to 1.4% in early April. Nevertheless, this level is still relatively low historically, indicating that mutual funds overall have not substantially exited the equity market.
Sector Consensus and Divergence: Industrial Overweight, Technology Divergence: In terms of sector allocation, there is a high consensus between the two types of institutions, but there are also clear exceptions. Hedge funds and mutual funds are both overweight in the industrial sector and underweight in the information technology sector, but their repositioning directions are completely opposite. In the first quarter, hedge funds increased the net tilt towards information technology by 853 basis points, marking the largest single-quarter change for this sector on record, while decreasing the net tilt towards the industrial sector by 297 basis points.
Mutual funds, on the other hand, engaged in the opposite actions, increasing their industrial exposure by 24 basis points and reducing information technology by 20 basis points. The two sectors with the most pronounced differences are financials and non-essential consumer goods: mutual funds are overweight in financials while hedge funds are underweight, and hedge funds are overweight in non-essential consumer goods while mutual funds are underweight.
Four “Common Favorites” Outperforming the Market Year-to-Date: Goldman Sachs identified four stocks this quarter that appeared simultaneously on the hedge fund VIP list (GSTHHVIP) and mutual funds’ overweight list (GSTHMFOW) – the “Common Favorites”: Boeing (BA), Mastercard (MA), Marvell Technology (MRVL), and Visa (V). MRVL is a newcomer this quarter, while Citigroup (C) and Vertiv (VRT) exited the list. These four stocks have delivered a return of 10% year-to-date, outperforming the equally weighted S&P 500 Index by 3 percentage points.
Looking at a longer time frame, since 2013, the “Common Favorites” portfolio has had an annualized return of 16%, but with a high standard deviation of 22%, indicating significant volatility. The median PE ratio of stocks in this portfolio is 34 times, a significant premium compared to the median PE of 18 times for the S&P 500. It is worth noting that all the “Seven Giants” are included in the hedge fund VIP list but are simultaneously underweight by mutual funds, showcasing a stark contrast in the two institutions’ stance on this core asset.
[Wall Street View]
Traditional Finance’s Great Rotation: Implications for Crypto Markets
The first quarter witnessed a remarkable consensus among U.S. institutional investors: a massive rotation from software into semiconductors, with hedge funds leading the charge while mutual funds adopted a more cautious stance. This fundamental shift in technology sector allocation carries significant implications for crypto markets as traditional finance’s risk appetite and thematic focus evolve.
The Software-to-Semiconductors Paradigm Shift
The most striking development is the historic reallocation away from software and into semiconductors. Hedge funds have pushed semiconductor long positions to all-time highs, while slashing software holdings to 2019 levels. Mutual funds have followed suit, reducing software exposure to 2012 lows and significantly overweighting semiconductors relative to software.
For crypto markets, this rotation represents a crucial signal. Semiconductors aren’t merely another tech subsector—they’re the physical backbone of both AI and blockchain infrastructure. As institutions increasingly favor tangible tech assets over purely software plays, we should expect similar risk-on flows toward crypto projects that bridge the physical and digital worlds. Mining hardware manufacturers, blockchain-specific chip developers, and projects enabling real-world asset tokenization stand to benefit most.
Divergent Institutional Strategies: Hedge Funds vs. Mutual Funds
The stark contrast between hedge funds and mutual funds reveals a bifurcated market approach that will likely spill over into crypto:
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Hedge funds have increased net leverage to near one-year highs, positioning aggressively into technology despite geopolitical tensions. This risk-on approach typically precedes increased crypto adoption by sophisticated investors.
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Mutual funds have raised cash holdings to 1.4% (still historically low), signaling caution. This group’s slow approach to crypto adoption may delay institutional inflows until clearer market signals emerge.
This divergence creates both opportunities and risks for crypto. Hedge funds’ aggressive positioning could drive early momentum in select crypto assets, while mutual funds’ waiting game may limit broader institutional adoption until regulatory clarity improves.
Sector Allocation Implications for Crypto Themes
The sector consensus and divergence between institutions reveal actionable insights for crypto positioning:
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Industrial sector overweight across both investor types suggests blockchain applications in supply chain, manufacturing, and logistics will see increasing attention. Projects solving real industrial pain points are primed for outperformance.
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Technology sector divergence is particularly telling. Hedge funds’ massive 853 basis point tilt toward information technology contrasts with mutual funds’ modest reduction. This dichotomy mirrors crypto’s positioning as both a technology and an asset class—potentially benefiting from hedge funds’ embrace while remaining on mutual funds’ sidelines.
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Financials vs. Non-essentials divergence presents interesting crypto opportunities. With mutual funds overweight in financials and hedge funds overweight in non-essentials, we should see continued development in both DeFi (serving financial needs) and consumer-facing crypto applications (NFTs, social tokens, payments).
The “Common Favorites” Framework and Crypto Parallels
Goldman’s identification of four outperforming “Common Favorites” across both hedge funds and mutual funds offers a valuable framework for identifying crypto assets with institutional appeal. These stocks delivered 10% YTD returns, significantly outperforming the broader market. The key characteristics driving this performance—premium valuations, growth narratives, and volatility tolerance—mirror the attributes of successful crypto projects.
For crypto investors, this suggests focusing on projects that:
1. Attract both sophisticated hedge funds and more conservative mutual funds
2. Command premium valuations based on future potential rather than current utility
3. Deliver on technological innovation while managing downside risks
The fact that all “Seven Giants” remain hedge fund VIPs while mutual funds remain underweight suggests similar divergent views on large-cap crypto assets versus emerging projects.
Market Structure Risks and Opportunities
The increased leverage (hedge funds at 85th percentile) and rising short interest (highest since 2011) create a precarious market structure that could impact crypto:
- Leverage contagion: As traditional markets become more leveraged, volatility events could spill over into crypto, particularly for assets with high correlation to tech stocks.
- Short positioning escalation: The rise in short interest suggests more sophisticated hedging strategies, which could create volatility opportunities for crypto traders.
- Cash levels: While mutual funds have increased cash holdings, the levels remain historically low, indicating significant dry powder that could flow into alternative assets like crypto during market dislocations.
Strategic Recommendations for Crypto Investors
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Focus on semiconductor-adjacent crypto projects: Companies developing blockchain-specific hardware, mining optimization technologies, or AI-blockchain integration solutions are well-positioned to benefit from the hardware rotation.
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Monitor hedge fund inflows: As the most aggressive institutional investors, hedge funds’ early moves into crypto will likely precede broader institutional adoption. Track which crypto assets appear on hedge fund radar.
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Differentiate between short-term momentum and long-term fundamentals: While the institutional rotation may drive short-term price movements, crypto projects with real-world applications (particularly in industrial and non-consumer sectors) offer more sustainable value.
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Prepare for volatility from market structure changes: The increased leverage and positioning in traditional markets could lead to volatility events that create buying opportunities in quality crypto assets.
The great rotation from software to semiconductors represents more than a quarterly rebalancing—it signals a fundamental shift in how institutions view technology’s future. For crypto markets, this transition creates both challenges and opportunities as the asset class positions itself alongside the physical infrastructure of the digital economy.