July 28, 2026, (Inside AI) — Global hedge funds are on track to surpass their 2025 returns, fueled by an artificial intelligence boom that propelled average gains to 7% in the first half, according to a Goldman Sachs client note seen by Reuters. This performance far exceeds the 10-year average of 4.1% and marks the sixth consecutive half-year of above-average returns.
The surge was broad-based, with every major hedge fund strategy attracting fresh capital for the first time in five years. Quantitative funds and multi-strategy vehicles led the inflows, while equity long/short funds posted blockbuster returns averaging 17.7%. Goldman attributed this to unusually strong stock-picking opportunities as AI-driven dispersion created wide gaps between individual stock performances.
Institutional investors surveyed by Goldman reported average hedge fund returns of 7.3%, while private capital investors including family offices and private banks saw 8.8%. A July survey of 341 allocators overseeing over $1.5 trillion found nearly half plan to increase hedge fund exposure in the second half, while only 3% expect to reduce it. Net demand reached a record, outpacing other alternative asset classes.
Goldman noted that hedge funds have outperformed a traditional 60/40 portfolio by roughly 250 basis points annually over the past five years, reflecting a more favorable environment for generating alpha. The first half of 2026 saw a 60/40 portfolio return 5.7%, boosted by an equity rally that offset softer fixed income performance.
AI Dispersion Fuels Stock-Picking Bonanza
The standout performance of equity long/short funds underscores how AI is reshaping market dynamics. Rather than a monolithic sector bet, managers profited from divergent fortunes among companies integrating AI, as detailed in a recent academic paper on AI's impact on asset pricing. This dispersion created fertile ground for active managers to exploit mispricings, a stark contrast to the passive investing era.
Quantitative funds, which rely on machine learning models to identify patterns, continued to attract strong inflows. Their success highlights the growing symbiosis between AI technology and investment strategies, a trend documented in the Goldman Sachs AI investing report. However, the concentration of AI-driven returns raises questions about sustainability if the technology theme falters.
Goldman's note stressed that the environment remains conducive for alpha generation, but history offers cautionary tales. The 2020-2021 period, the only time first-half returns exceeded current levels, was marked by extreme volatility and unprecedented fiscal stimulus. Today's landscape is different: tighter monetary policy and geopolitical risks could quickly alter the backdrop.
Record Allocator Demand Masks Concentration Risk
The record net demand from allocators signals robust confidence, but it also concentrates risk in an industry increasingly dominated by a few large multi-strategy firms. These platforms, which deploy capital across diverse teams, posted their strongest inflows in five years. Yet their size and interconnectedness could amplify systemic shocks, a concern raised by regulators but largely unaddressed in Goldman's analysis.
Moreover, the survey's optimistic outlook hinges on AI continuing to drive market gains. If the AI trade unwinds, the rush to increase exposure could reverse sharply, leaving allocators exposed to illiquid positions. The note did not detail how hedge funds are hedging against such a scenario, a notable omission given the industry's checkered history with crowded trades.
Stock-trading hedge funds finished June with double-digit returns, aided by navigating already crowded trades. This agility may be tested if AI stocks, which have led the rally, face a correction. The broader asset management industry's outperformance over passive benchmarks, while impressive, relies on sustaining this narrow leadership.
Reporting adapted from original Reuters coverage; additional analysis incorporates independent research and public data.
