Hedge Funds Retreat from ‘Magnificent Seven’ Ahead of Earnings Season

Global hedge funds sharply pared back exposure to the “Magnificent Seven” mega-cap tech stocks, Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta, and Tesla, cutting allocations in April to their lowest levels in two years. The move, widely interpreted as a tactical retreat ahead of a pivotal earnings season, has signaled a growing sentiment shift towards what has long been the market’s most crowded trade, meaning too many investors own the same stocks.

According to a Morgan Stanley client note cited by Reuters, these seven companies accounted for more than 60% of the total dollar amount sold by hedge funds last month between April 14 -16th. This heavy selling shows that fund managers are having second thoughts about these popular stocks. They worry about weak business performance, high stock prices, and poor earnings reports.

Tesla reported earnings on April 22 with a 20% drop in auto revenue; the stock plunged 44 percent through April. Despite the recent recovery, it is still down about 15 percent YTD through mid-May. Through April, all seven stocks underperformed the broader S&P 500, and through some of the recovery in mid-May 2025, have experienced varied performance, reflecting shifting investor sentiment and market dynamics. While some, including Microsoft and Meta, have recouped from April’s declines, others continue to face headwinds.

The Great Tech Rotation

The shift is especially notable because the Magnificent Seven were at the heart of 2023’s AI-fueled equity rally. At the peak, long exposure to these names was a defining feature of many long/short equity portfolios, although that positioning now appears to be rapidly unwinding.

This strategic recalibration isn’t occurring in a vacuum. It mirrors broader investor concerns reflected in Bank of America’s April global fund manager survey. Nearly 60 percent of respondents cited the Magnificent Seven as the most crowded trade a few months ago. That number has now plummeted to 24 percent based on the BofA survey. In a striking reversal, gold has taken the top spot, with 49 percent of respondents calling it the most popular trade. As economic uncertainty deepens and geopolitical risks rise, the allure of hard assets is increasingly overshadowing the previous optimism surrounding tech valuations.

The implications of this shift are significant. For many hedge funds, the Magnificent Seven trade was not just a bet on tech; it was a levered call on secular growth, AI, and market leadership. By reducing these exposures, funds are signaling a broader risk-off stance or at least recognizing that concentration in mega caps may no longer be the best path to alpha.

The selling wasn’t limited to tech stocks. According to Morgan Stanley, hedge funds also trimmed positions in a wide swath of other sectors last week, including biotech, aerospace and defense, healthcare insurers, and leisure, indicating the de-risking goes far beyond tech. The breadth of this rotation suggests a pivot toward more diversified, idiosyncratic bets rather than thematic exposure.

From Tech to Safe Havens

This realignment is particularly pronounced among high-profile managers. Third Point, the hedge fund led by Daniel Loeb, made notable changes in the first quarter. The firm completely exited positions in Tesla and Meta, slashed its stake in Amazon by over one million shares, and purchased $1.45 million shares of Nvidia. The move reflects conviction around AI infrastructure, even as broader tech enthusiasm is cooling.

The recent earnings season has provided fresh insights into the Magnificent Seven’s performance. It has prompted allocators to reassess their strategies and whether this may be a short-term tactical adjustment or a longer-term reassessment of the tech-led investment thesis. Microsoft’s recent results exceeded expectations, with revenue reaching $70.1 billion, a 13% increase year-over-year, driven by a 33% growth in Azure and other cloud services, bolstered by strong demand for AI offerings.

Hedge funds are increasingly prioritizing performance preservation amid rising market volatility. The concentrated bets that yielded substantial gains in 2023 have become much riskier in 2025. Allocators monitoring exposures may interpret the current shift not as abandoning tech altogether but as a strategic reallocation toward more asymmetric opportunities.

This strategic pivot underscores a renewed emphasis on discipline among investors. Leading managers are willing to rotate out of consensus long positions ahead of earnings, reflecting a proactive approach to downside risk management. Reliance on beta-driven returns is no longer sufficient in an environment characterized by tightening financial conditions, unpredictable interest rate expectations, and policy-induced market fluctuations.

This period serves as a real-time stress test. The agility with which managers adapt to shifting fundamentals, actively reduce portfolio correlations, and thoughtfully incorporate optionality provides valuable insights into their investment processes and philosophies. The current earnings season is less about picking winners. Instead, it’s more about watching how managers handle complex markets. The bigger story may be the strategic evolution of long/short equity investing. The trade that once defined the post-COVID cycle is now being de-emphasized in favor of flexibility, risk sensitivity, and cross-asset thinking.

The Bottom Line

Whether this is the end of the Magnificent Seven era or just a pause, one thing is clear. The playbook that rewarded concentration and consensus is giving way to a market that values adaptability, discipline, and differentiated thinking. For long/short equity managers and allocators, the challenge now is not just where to invest but how to rethink risk and redefine alpha in a more uncertain world.