Goldman Sachs Says Hedge Funds Had Their Worst Underperformed Against The S&P 500 In More Than 20 Years

Hedge funds had their worst underperformance against the S&P 500 in more than two decades in July, Goldman Sachs said.

"Our Hedge Fund VIP list of the most popular long positions suffered its worst 1-month underperformance vs. the S&P 500 in more than 20 years of history, and July marked one of the sharpest hedge fund de-grossing episodes of the past decade," bank strategists said.

"Funds trimmed positions in a number of AI stocks, including many semiconductors and most of the mega-caps," the bank added. "Hedge fund performance, leverage, and the most popular long positions have swung sharply with the AI trade during the last few months."

However, the bank added, the funds still rank above longer-term averages. "Despite the volatility, US equity long/short hedge funds have returned 10% through mid-August."

The decline of AI-related stocks in July was marked by the collapse of Situational Awareness, the fund ran by Leopold Aschenbrenner. It had ballooned to roughly $45 billion in assets earlier this month before collapsing to around $10 billion after a sharp selloff in AI-related stocks forced it to unwind its leveraged positions.

The fund ultimately sold its public equity holdings, including stakes in companies such as SK Hynix and CoreWeave, to Citadel at a discount after facing mounting margin pressure.

The fund's assets ended up being bought by Ken Griffin's Citadel at discounted prices.

JPMorgan CEO Jamie Dimon reacted to the development, warning that high levels of leverage across financial markets have the potential of causing disruption in the markets in the future.

Speaking to CNBC's Leslie Picker, Dimon said "margin debt is the highest it has ever been."

"There's a lot of margin debt you don't see because it's not called margin debt. It's called other things. It's that kind of leverage, some hidden, some public," he added.

Dimon went on to say that such leverage can lead fewer investors to cause broader volatility in the market .

"When you have that, you do have a higher chance that somebody will disrupt the market in a quick way, and people get rattled over it," he said.