Hedge fund stock pickers are navigating their most challenging stretch in years. Goldman Sachs Prime Services reports that fundamental equity long-short funds recently endured a three-week performance slump comparable to the volatility seen in early 2022. The primary driver of this downturn is a significant re-rating across the technology sector. Software-as-a-Service (SaaS) companies have been hit hardest as investors reassess the "AI displacement" risk. Benchmark indices like the iShares Expanded Tech-Software Sector ETF (IGV) recorded a sharp decline of nearly 25% during the peak of this rotation. Valuations in the software space had reached historical extremes before the selloff, sitting in the 10th decile of their price-to-forward earnings history. Recent market movements have since dragged these valuations down to the 8th decile. This correction was accelerated by new AI model releases that sparked fears of disruption for established software firms. Despite the turbulence in software, a clear divergence has emerged within the tech landscape. While software struggled, the iShares Semiconductor ETF (SOXX) remained resilient, posting gains of over 5% during the same period. This highlights a shift in capital away from application-level software and toward the hardware and infrastructure powering the AI era. Overall market concentration remains at historic highs. The "Magnificent 7" now represent over 35% of the S&P 500's total market capitalization. These seven firms saw earnings growth of approximately 30% in recent cycles, significantly outperforming the 6% growth seen in the remaining 493 companies. Macroeconomic headwinds are adding to the pressure on stock pickers. Recent data shows a cooling U.S. economy, with Q4 GDP growth slowing to 1.4%—the second-lowest quarterly print of the year. Inflation remains stubborn, with Core PCE reaching 3.0%, well above the Federal Reserve’s target. Hedge fund positioning reflects these shifts, with net exposure to software falling to five-year lows. Conversely, managers have ramped up allocations to semiconductors and healthcare, particularly biotech. While gross leverage across prime brokerage books has hit record highs, the "alpha generation" for stock-specific bets remains under intense pressure due to high factor volatility and rapid sector rotations. [Market Analysis: The Recent Tech Sell-Off](https://www.youtube.com/watch?v=ajtDPRsDVHM) This video provides professional insight into the specific factors driving the recent software stock downturn and how AI disruption is reshaping the technology sector. http://googleusercontent.com/youtube_content/0