Hedge Funds Sell, Retail Buys: Whose The Smart Money?

According to Goldman Sachs prime brokerage division, hedge funds cut technology positions in mid-October at the fastest rate since 2016. The selling helps explain recent weakness in the Nasdaq 100, which recently had its worst week since April 2025. Goldman’s data also shows that global AI stocks gave back every dollar of net buying hedge funds had accumulated since early 2025. The data, which some may read as suggesting hedge funds are bracing for a decline, is a little misleading.

Technology shares still represent 23.5% of Goldman’s global prime book, putting it in the upper 90th percentile over the past five years. While total technology holdings matter, what’s more telling is the speed of the reductions. To that end, hedge fund net leverage fell to a one-year low of 48.6%, suggesting they reduced leverage in a more defensive posture but kept their exposure to technology stocks.

That distinction is important. Selling at a record pace from a 90th-percentile allocation is not capitulation. It is a crowded trade getting marginally less crowded. There remains considerable room to deleverage and sell if the AI financing story deteriorates further. However, now there is room for hedge funds to lever back up into the technology sector.

Retail investors, known by institutional investors as the “dumb money,” bought $2.6 billion of semiconductors the same week hedge funds sold aggressively. $2.6 billion is a 96th-percentile reading. When professionals sell a crowded position and retail steps in to absorb it, the market has historically viewed that as a bearish signal. Recently, however, the “dumb money” has been on the right side of the trade more often than not.

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Healthcare Is Red Hot: Time For a Change?

The “out-of-technology” rotation is playing out in an interesting way. About a month ago, the technology sector was in the upper-right corner of the graph, with absolute and relative scores in the 80s and low 90s at times. Except for energy, almost every other sector was oversold, with many deeply oversold. In less than four weeks, healthcare is now very overbought, alongside energy, which lingers in overbought territory due to the Iran war. Many interest-rate-sensitive stocks are clustered at fair value. Sitting slightly in oversold territory are technology alongside the more energy-sensitive transportation and industrial stocks.

Healthcare stocks are unique in that they are not overly sensitive to interest rates or economic activity. Thus, with the sell-off in technology, it seems to be the sector investors are most comfortable with. Interest rate-sensitive stocks like utilities, staples, and real estate have improved but seem hesitant to lead the market as rates remain very high and it’s still unclear whether this bond rally has further to go. Similarly, with higher rates and the Fed likely raising rates again Wednesday or in December, investors aren’t gung-ho about economically sensitive stocks. For now, healthcare seems like the safe sector. However, healthcare is very overbought and seemingly ripe for a rotation in the coming weeks.

Will the technology financing concerns continue, pushing the sector into more oversold territory? Might rates keep falling and, in the process, boosting interest rate-sensitive stocks? Lastly, energy is and has been very overbought. It might continue that way until the Iran crisis simmers down. But beware: a durable peace agreement with Iran could likely set energy stocks to underperform and push the sector to the bottom-left corner of the scatter plot.

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