Key Takeaways
- • Global equity hedge funds reduced risk at the fastest pace in more than a decade during the first week of November, per Morgan Stanley prime brokerage data, as a sharp AI stock selloff triggered widespread deleveraging.
- • Gross market value of long/short equity hedge fund positions has fallen 10.7% since late June.
- • Asia-based hedge funds lost an average of 1.5% in the first week of November versus a decline of more than 5% in the MSCI Asia-Pacific Index, cutting their year-to-date gains to approximately 2.6% versus 6% for US-based managers.
- • Hong Kong and China were the only markets with net buying, supported by state-backed intervention encouraging funds to cover domestic short positions; China-focused strategies gained 1.1% and are up 6.7% year to date.
- • In the US, net leverage among long/short equity managers dropped five percentage points in a single session to 42%, while Asian gross leverage fell three points to 124%, near the April 2025 low of 123%.
Summary
Global equity hedge funds reduced risk at the fastest pace in more than a decade during the first week of November, according to Morgan Stanley prime brokerage data. The reduction followed a sharp selloff in artificial intelligence stocks that triggered widespread deleveraging across major markets. The gross market value of long/short equity hedge fund positions has declined 10.7% since late June, reflecting a significant retreat from equity exposure as concerns over AI valuations and the implications of the US midterm elections weighed on sentiment.
Hedge funds recorded negative returns in all major regions during the week. Asia-based managers lost an average of 1.5%, compared with a decline of more than 5% in the MSCI Asia-Pacific Index. These losses reduced Asian hedge funds' year-to-date gains to approximately 2.6%, while US-based managers were up 6% year to date. In the US, net leverage among long/short equity managers dropped five percentage points in a single trading session, to 42%.
China-focused equity strategies were the notable exception, gaining an average of 1.1% during the week and extending their annual return to 6.7%. Hong Kong and China were also the only markets to record net buying, supported by state-backed intervention that encouraged hedge funds to cover short positions in domestic equities, particularly in consumer, semiconductor and state-owned companies.
Elsewhere in Asia, managers concentrated risk reductions in technology stocks, cutting long positions and increasing bearish bets, particularly in Taiwan and South Korea. Fundamental equity managers led the selling, while multistrategy, macro and quantitative funds reduced short exposure. Gross leverage among Asian equity long/short funds fell three percentage points to 124%, approaching the 123% low recorded during the tariff-driven market turmoil of April 2025.
The rapid reduction highlights the extent of hedge fund deleveraging following October's market disruption, as managers reassess concentrated technology positions and seek to contain further losses amid elevated volatility.
Hedge funds recorded negative returns in all major regions during the week. Asia-based managers lost an average of 1.5%, compared with a decline of more than 5% in the MSCI Asia-Pacific Index. These losses reduced Asian hedge funds' year-to-date gains to approximately 2.6%, while US-based managers were up 6% year to date. In the US, net leverage among long/short equity managers dropped five percentage points in a single trading session, to 42%.
China-focused equity strategies were the notable exception, gaining an average of 1.1% during the week and extending their annual return to 6.7%. Hong Kong and China were also the only markets to record net buying, supported by state-backed intervention that encouraged hedge funds to cover short positions in domestic equities, particularly in consumer, semiconductor and state-owned companies.
Elsewhere in Asia, managers concentrated risk reductions in technology stocks, cutting long positions and increasing bearish bets, particularly in Taiwan and South Korea. Fundamental equity managers led the selling, while multistrategy, macro and quantitative funds reduced short exposure. Gross leverage among Asian equity long/short funds fell three percentage points to 124%, approaching the 123% low recorded during the tariff-driven market turmoil of April 2025.
The rapid reduction highlights the extent of hedge fund deleveraging following October's market disruption, as managers reassess concentrated technology positions and seek to contain further losses amid elevated volatility.
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