Capital continues rotating from software to semiconductors

Overview

This report compares U.S. equity holdings of hedge funds and mutual funds at the start of Q2 2026. The core conclusion is that both groups continued to rotate within Information Technology from software to semiconductors; at the same time, overall equity risk exposure remained elevated and fund performance dispersion was wide. The report also discusses shared favorite stocks, relative sector allocation, S&P 500 earnings and return forecasts, and Goldman Sachs thematic basket performance.

Core views

At the allocation level, hedge funds and mutual funds largely agreed on most sectors: Industrials were jointly overweight, while Information Technology was jointly underweight; the main divergences were in Financials and Consumer Discretionary, where Financials were overweight in mutual funds but underweight in hedge funds, and Consumer Discretionary was overweight in hedge funds but underweight in mutual funds. Within Information Technology, both fund types reduced software and increased semiconductors. Hedge funds added LRCX, AMAT, and ASML, while mutual funds added INTC and SITM; both groups were net sellers of MSFT in Q2.

Analysis framework

The report uses holdings disclosures, fund baskets, relative sector weights, net leverage, cash ratios, year-to-date returns, and historical percentiles as its primary analytical framework to compare hedge fund and mutual fund allocation differences at the sector, thematic, and single-stock levels, while also using Goldman Sachs Prime Services data to assess hedge fund performance.

Methodology notes

• Holdings comparisonHedge Fund Trend Monitor and Mutual Fundamentals

  Comparing hedge fund and mutual fund equity holdings at the start of Q2

  The sample covers 1,059 hedge funds and 509 large active mutual funds, and is used to analyze sector tilts, single-stock buys and sells, shared favorite stocks, and portfolio performance.

• Thematic basketGSTHHVIP and GSTHMFOW overlap

  Overlap between hedge fund VIP longs and mutual fund overweight stocks

  Shared favorite stocks include BA, MA, MRVL, and V; the report uses this overlap basket to observe institutional consensus and its performance versus the equal-weight S&P 500.

• Risk exposureNet leverage and cash allocation

  Measuring equity risk exposure via hedge fund net leverage and mutual fund cash ratios

  Hedge fund net leverage rose to the 85th percentile of the past five years, while mutual fund cash ratios increased from 1.1% at the start of 2026 to 1.4% in early April, though they remained historically low.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Semiconductors

  Benefits from allocation rotation by hedge funds and mutual funds

  Strengths

  Hedge fund semiconductor long weight reached a record high; mutual funds meaningfully improved their relative tilt toward semiconductors versus software; LRCX, AMAT, ASML, INTC, and SITM all saw increased institutional buying.

  Weaknesses

  Some semiconductor names have already entered the institutional consensus zone, increasing valuation and crowding risk.

  Comparison

  Compared with Software, semiconductors are receiving stronger capital inflows and higher portfolio weights.

  Risks

  Slower AI hardware demand, capital expenditure cuts, valuation compression, and a reversal of crowded trades.

• Software

  Jointly underweighted by hedge funds and mutual funds

  Strengths

  The long-term business model and cash flow quality may still support high-quality software companies.

  Weaknesses

  Hedge fund software weight fell to its lowest level since 2019; after excluding MSFT, mutual funds' underweight to software was the largest since 2012.

  Comparison

  Compared with semiconductors, software is in a capital outflow direction.

  Risks

  If semiconductor trades become overheated or software fundamentals improve, capital may rotate back into software on a temporary basis.

• ASML.US

  One of the stocks in the semiconductor equipment chain that hedge funds net added

  Strengths

  The report explicitly notes that hedge funds net added ASML among semiconductor stocks, showing that it benefits from the semiconductor allocation rotation.

  Weaknesses

  The report does not provide a standalone rating, target price, or earnings forecast for ASML.

  Comparison

  It belongs to the same group as LRCX and AMAT, which hedge funds also added.

  Risks

  Order cycle risk, export restrictions, advanced-node capex volatility, and sensitivity to a high valuation.

• Shared favorites: BA, MA, MRVL, V

  Shared favorite stocks that appear in both Hedge Fund VIP and Mutual Fund Overweights

  Strengths

  Up 10% year to date, outperforming the equal-weight S&P 500 by about 3 percentage points; historically has a record of outperformance.

  Weaknesses

  Shared favorite stocks often have higher volatility, and their median P/E is 34x, above the 18x median of S&P 500 stocks.

  Comparison

  Compared with the standalone mutual fund overweight basket, the shared favorite basket has performed more strongly since 2023.

  Risks

  Valuation premium, crowded ownership, style reversal, and declining market risk appetite.

Key data

• Coverage AUM$9 trillionThe report analyzes approximately $9 trillion in equity holdings or assets at the start of Q2 2026.
• Hedge fund sample1,059 funds; $4.6 trillion gross equity positionsThis includes about $3.1 trillion in long positions and $1.5 trillion in short positions.
• Mutual fund sample509 funds; $3.9 trillion equity assetsThe sample consists of large active mutual funds.
• U.S. equity long/short hedge fund YTD return7%Estimated by Goldman Sachs Prime Services, supported by beta and long alpha.
• Hedge Fund VIP Basket YTD return13%Above the 7% return of the equal-weight S&P 500.
• Large mutual fund outperformance rate30%Below the 37% historical average since 2007.
• Hedge fund net leverage85th percentile over last five yearsIt fell after geopolitical tensions and then rose to a one-year high.
• Mutual fund cash ratio1.4%It rebounded from a low of 1.1% at the start of 2026, but remains extremely low relative to history.
• Shared favorite stocksBA, MA, MRVL, VUp 10% year to date, outperforming the equal-weight S&P 500 by about 3 percentage points.
• Shared favorite stock valuation34x vs. 18xThe median P/E of the shared favorite stocks is significantly higher than that of the median S&P 500 stock.
• S&P 500 forecast2026 year-end forecast 7600; current 7446The chart shows Goldman Sachs' forecast as of late May 2026.

Impact & implications

Capital flows show that institutional investors are shifting risk budget within Information Technology from software to semiconductors, which may continue to support the relative performance of semiconductor equipment, chips, and AI-related hardware supply chains. However, shared favorite stocks carry a higher valuation premium and greater volatility, while both hedge fund leverage and mutual fund equity exposure are elevated, suggesting that if the market sells off or earnings expectations are revised down, crowded trades and high-valuation assets may face greater correction pressure.

Risks

• Crowding in the semiconductor trade is rising; if earnings or capital expenditure expectations are revised down, the pullback could be amplified.
• Hedge fund net leverage is at a high percentile over the past five years, so faster deleveraging may be triggered if market volatility rises.
• Mutual fund cash ratios remain at historically low levels, leaving limited defensive cushioning.
• Shared favorite stocks trade at a clear valuation premium, making high-valuation assets more sensitive to interest rates and growth expectations.
• This report is thematic and sector strategy research, and does not constitute independent investment advice for any single security.

What to watch

• Whether the holding gap between semiconductors and software continues to widen.
• Subsequent earnings and order trends for LRCX, AMAT, ASML, INTC, and SITM after they were added.
• Whether MSFT and other Magnificent 7 stocks continue to be sold by mutual funds and hedge funds.
• Whether hedge fund net leverage falls back from elevated levels.
• Whether mutual fund cash ratios continue to rise, signaling a shift in risk appetite.
• Valuation, volatility, and relative S&P 500 performance of the shared favorite basket composed of BA, MA, MRVL, and V.