A rare consensus emerged among US hedge funds and large mutual funds during the first quarter, characterized by a synchronized exodus from software stocks and a aggressive accumulation of semiconductor positions. This strategic pivot pushed the weight of semiconductor holdings in long portfolios to unprecedented levels. Data compiled by Woofun AI indicates that this analysis covered 1,059 hedge funds managing $4.6 trillion in stock portfolios and 509 large active mutual funds with $3.9 trillion in assets. The performance divergence was stark: hedge funds secured a 7% return year-to-date, whereas only 30% of large mutual funds outperformed their benchmarks, a figure below the 37% historical average recorded since 2007.

The 13F filing data for the first quarter confirmed a clear market alignment where both institutional classes reduced software exposure while expanding semiconductor allocations. The magnitude of these adjustments drove net leverage for hedge funds to the 85th percentile over the past five years, marking a high level for the current year.

Concurrently, the average short-selling ratio for S&P 500 stocks rose to 3% of market value, the highest since 2011, reflecting an intensification of both bullish and bearish forces. Woofun AI notes that this simultaneous leverage increase and shorting activity suggests a market environment defined by heightened conviction on both sides.

Structural reallocation within the technology sector dominated the quarter's narrative. Semiconductor weights in hedge fund long portfolios reached all-time highs, while software stock allocations fell to their lowest point since 2019. Mutual funds mirrored this trend, with software holdings dropping to 2012 lows. Excluding Microsoft, the relative overweight of semiconductors versus software stocks in mutual fund portfolios was the largest observed since 2012.

This shift underscores a fundamental rotation from software-centric growth narratives toward hardware infrastructure plays.

At the individual equity level, Microsoft (MSFT) saw the most significant reduction in holdings across both hedge funds and mutual funds. Mutual funds also trimmed positions in the remaining six members of the "Big Seven" tech giants. While hedge funds reduced exposure to most of these names, they paradoxically increased net holdings in Meta Platforms and Apple Inc. In the semiconductor space, hedge funds added net positions in LRCX, AMAT, and ASML, whereas mutual funds focused their buying on INTC and SITM.

Geopolitical tensions in the first quarter elicited distinct strategic responses from these institutional groups. Hedge funds initially deleveraged but rapidly re-expanded positions as markets rebounded in the second quarter, restoring net exposure to elevated levels. In contrast, mutual funds opted to accumulate cash, raising the cash portion of their portfolios from a record low of 1.1% at the start of 2026 to 1.4% by early April. Despite this increase, the cash level remains historically low, indicating that mutual funds have not significantly retreated from the equity market.

Sector allocation strategies revealed both convergence and divergence. Both groups maintained an overweight stance on industrials and underweight on information technology, yet their adjustment trajectories were opposite. Hedge funds increased their net bias toward information technology by 853 basis points in the first quarter, the largest single-quarter swing on record, while cutting industrial bias by 297 basis points. Mutual funds moved inversely, increasing industrial exposure by 24 basis points and reducing technology exposure by 20 basis points. Woofun AI analysis suggests this split highlights a tactical disagreement on the duration of the technology sector's recovery.

The most pronounced divergence appeared in finance and non-essential consumer goods, where mutual funds overweighted finance while hedge funds underweighted it, and vice versa for consumer goods. Four stocks appeared on both the hedge fund VIP list and the mutual fund overweight list: Boeing (BA), MasterCard (MA), Marvell Technology Group Ltd (MRVL), and Visa (V). MRVL was a new addition, replacing Citigroup (C) and Vertiv (VRT). This "common favorite" portfolio has generated a 10% return year-to-date, outperforming the equal-weighted S&P 500 by 3 percentage points. Since 2013, the annualized return for this group stands at 16%, though with a high standard deviation of 22%. The median price-earnings ratio for these stocks is 34 times, significantly exceeding the 18 times median for the S&P 500.

Notably, all six "Big Seven" members remain on the hedge fund VIP list but are simultaneously underweighted by mutual funds, illustrating a sharp contrast in institutional sentiment toward core tech assets.