Technology hedge funds just had their strongest month in 26 years.

But that return was almost a perfect match with the S&P 500’s performance.

According to PivotalPath, the hedge fund research firm, technology funds were just 16 basis points, a mere .06 percent, away from the S&P’s performance, and that’s the closest match ever. The Technology/Media/Telecom Index had a beta of .99 to the S&P 500 in April (a beta of 1 means the index moves in lockstep with the benchmark, assuming there is no alpha) — the highest of all 40 categories of hedge funds tracked by the firm.

The pattern, however, has persisted for a year and a half. Over the last 18 months, the correlation of tech funds to the S&P and Nasdaq was .96, just below the April record. Beta — that .99 calculated over the last 18 months — has also never been higher other than February and March of this year.

The findings suggest that AI’s dominance is no longer confined to benchmark construction. Even many of the world’s top technology investors are increasingly moving closer to the broader market.

The obvious question is whether tech hedge funds have become closet indexers. Jon Caplis, CEO of PivotalPath, says technology funds are generating alpha, or returns above what the market itself would deliver. Over the last 18 months, annualized alpha versus the S&P was 4.2 percent, not bad, even if below the historical median of 5.2 percent.

According to PivotalPath, going back to 2000, the beta, or average exposure, of the TMT index to the S&P 500 was .4, far less than today. Analyzed on a rolling basis, other than during the global financial crisis, beta has never been above .5. Managers historically ran portfolios that had half as much exposure to the S&P 500.

But everything changed, according to Caplis, at the end of 2024 when technology funds steadily went from roughly .5 to close to 1 right now. “That’s AI taking over all the growth of the S&P,” said Caplis.

The concentration of the S&P 500 has been extreme. According to analysts at Goldman Sachs, the top tech stocks accounted for 53 percent of the S&P 500’s returns last year.

With a beta of .99, the alpha math is simple: if the S&P returned 10 percent, as it did last month, and a fund’s alpha was 4 percent, the fund’s return would be 14 percent. Caplis said that straightforward relationship is important in understanding that TMT funds have returned more than the S&P, but they are getting almost all of their exposure from broader market movements.

The result is a strange dynamic: some of the world’s most sophisticated technology investors are still adding value, but increasingly on top of benchmark-like exposure. The findings also point to a broader issue emerging across markets: diversification itself may increasingly recreate the very exposures investors are trying to avoid.

The top minds and stock pickers in technology are represented in the TMT index. “That tells you how difficult it is to differentiate from the market,” Caplis said.

But the phenomenon extends well beyond technology hedge funds and beyond the U.S. According to PivotalPath, six of its indices sit at record-high correlations to global equity benchmarks, including long-short equity, multi-strategy, and event-driven funds.

What makes the trend especially counterintuitive is that the increased exposure is not always obvious at the individual manager level. According to Caplis, many individual credit and multi-strategy managers, while historically elevated, still appear only moderately correlated to equity markets on their own — even as the broader index shows much higher correlation. But when allocators combine multiple managers in search of diversification, the underlying market exposure increasingly reappears at the portfolio level.In one example, PivotalPath’s credit index had a .94 correlation to the S&P 500 over the last year, while the average individual credit manager showed only about half that level of correlation.

As recently as 2015, technology managers often had correlations near zero to the S&P 500, meaning they were generating returns largely independent of the broader market. Today, AI-driven concentration has made that much harder.

“It’s almost impossible to get away from now,” said Caplis.

Genuinely diversifying strategies still exist, but they increasingly sit outside the areas where many investors have recently concentrated their investments. According to PivotalPath, equity sector strategies garner roughly 18 percent of overall investor interest, while TMT comprises about one-third of equity sector interest or about 6 percent of overall strategy interest. Managed futures, global macro, and some systematic strategies, such as equity quant, consistently provide meaningful diversification during periods of market stress, he said.

“People kind of left them for dead,” Caplis said, noting that managed futures were among the worst performing strategies last year during the equity rally, but have rebounded this year. AI concentration may be compressing differentiation across many strategies, which could make true diversifying funds more valuable.

Technology managers are still generating alpha. The problem is that alpha increasingly sits on top of massive shared market exposure.

If markets continue rising, that may not matter much. But if AI-driven concentration reverses, even highly skilled managers could struggle to protect investors from broad losses.

“[If exposures remain the same and] if the S&P is off 20 percent, these guys are going to be down huge,” Caplis said. “They might be down 15 percent, and you might be okay with that. But that’s what you’re looking at.”

That tension may ultimately be the clearest signal of how deeply AI concentration has reshaped modern markets.

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AI Is Making Even Tech Hedge Funds Look Like the S&P 500