Goldman Sachs has flagged a record low correlation between AI-related trades and the rest of the market, a development that is pushing hedge funds to pull back from AI bets. The divergence, the bank said, is stoking volatility and throwing momentum strategies off balance, forcing funds to reposition.
A widening gap between AI and everything else
For months, AI trades moved in lockstep with the broader market. That pattern has broken. Goldman Sachs now sees the lowest correlation on record between AI-linked positions and non-AI trades, meaning the two are behaving less and less like a single market. When AI stocks rally, the rest of the market no longer follows. And when they fall, the broader indexes don't necessarily feel it. That split is a problem for funds that built strategies around momentum, which depends on trends persisting across sectors.
Why hedge funds are stepping back
With correlation this low, the usual playbook stops working. Momentum strategies rely on price trends continuing, but when AI and non-AI trades move in opposite directions, those trends become unreliable. Hedge funds, which had piled into AI names during the rally, are now reducing those positions. The retreat is a direct response to the uncertainty created by the divergence. Funds that once bet big on AI are cutting exposure, trying to avoid getting caught on the wrong side of a market that no longer moves as one.
Volatility on the rise
The divergence isn't just a technical anomaly. It's amplifying market swings. With AI and non-AI trades decoupled, price movements in one segment no longer offset the other, leading to sharper, less predictable moves. Goldman Sachs pointed to the increased volatility as a direct consequence of the split. For traders, that means more risk and less clarity. The usual hedges — like pairing a long AI position with a short in another sector — become less effective when the two aren't moving together.
Repositioning underway
Faced with a market that doesn't behave the way it used to, hedge funds are shifting their portfolios. The repositioning is ongoing, with managers rebalancing away from the AI trade and looking for strategies that can handle the new dynamics. The question now is how far the retreat goes. If the divergence persists, more funds may follow suit, which could further pressure AI stocks. But if the correlation snaps back, those who left early might find themselves on the sidelines.
The coming weeks will show whether the divergence holds or fades. For now, hedge funds are betting on caution.
