Key Takeaways
- • Global hedge funds suffered their worst day since the COVID-era market rout as a renewed tech selloff, driven by skepticism over massive AI buildout spending, deepened this week, according to Reuters.
- • Goldman Sachs estimates global fundamental long-short funds fell 3.8% in October through October 22 but remain up 8.8% year-to-date.
- • Tech-focused hedge funds were down roughly 10% and Asia-focused funds roughly 9% this month through October 22, per Goldman Sachs.
- • Meta slumped 7% on Thursday after announcing a new class of shares to help fund AI spending; Nvidia fell 4% and the Nasdaq Composite lost 2.6%, its largest decline since June 5.
- • Losses in crowded AI-linked trades triggered hedge fund deleveraging, with losses on China and technology holdings and a squeeze in crowded short positions weighing on performance.
Summary
Global hedge funds were hit by a fresh technology sell-off this week, with major strategies posting their worst day since the COVID-era market rout, Reuters reported on October 23. The renewed selloff in big technology stocks was driven by growing investor skepticism over the massive spending on AI infrastructure by large technology companies. Goldman Sachs' prime brokerage team wrote in a client note, "If last Thursday felt bad, today has been worse."
Meta Platforms was a catalyst for the decline. The company said it would issue a new class of shares to help raise funds for its AI model development, and its stock slumped 7% on Thursday, its largest drop since July. Nvidia fell 4%, and the broader Nasdaq Composite lost 2.6%, its largest decline since June 5. Asian markets, from South Korea to China, also sold off, pressured by higher oil prices and concerns over heavy AI spending.
Market participants said the downturn triggered deleveraging among hedge funds, as losses in crowded AI-linked trades forced investors to cut exposure and reduce risk. According to Goldman Sachs, global fundamental long-short funds, or stock pickers, have dropped 3.8% so far in October but are still up 8.8% year-to-date. Performance was weighed down by losses on China and technology holdings, as well as a squeeze in crowded short positions. Tech-focused and Asia-focused hedge funds were among the biggest losers this month through October 22, down roughly 10% and 9%, respectively.
Masaki Gotoh, a partner at Tokyo-based TriVista Capital, said his fund had trimmed its hardware investments since late June. While he expressed strong conviction in AI, he warned that "the concentration level is staggering," comparing it to the IT dot-com bubble, and flagged concern over circular financing.
Meta Platforms was a catalyst for the decline. The company said it would issue a new class of shares to help raise funds for its AI model development, and its stock slumped 7% on Thursday, its largest drop since July. Nvidia fell 4%, and the broader Nasdaq Composite lost 2.6%, its largest decline since June 5. Asian markets, from South Korea to China, also sold off, pressured by higher oil prices and concerns over heavy AI spending.
Market participants said the downturn triggered deleveraging among hedge funds, as losses in crowded AI-linked trades forced investors to cut exposure and reduce risk. According to Goldman Sachs, global fundamental long-short funds, or stock pickers, have dropped 3.8% so far in October but are still up 8.8% year-to-date. Performance was weighed down by losses on China and technology holdings, as well as a squeeze in crowded short positions. Tech-focused and Asia-focused hedge funds were among the biggest losers this month through October 22, down roughly 10% and 9%, respectively.
Masaki Gotoh, a partner at Tokyo-based TriVista Capital, said his fund had trimmed its hardware investments since late June. While he expressed strong conviction in AI, he warned that "the concentration level is staggering," comparing it to the IT dot-com bubble, and flagged concern over circular financing.
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