Global hedge funds hammered by AI sell-off this week, Asia managers lead losses

Global hedge funds faced substantial losses this week, driven by a significant unwinding of artificial intelligence (AI) investments, with Asia-focused managers experiencing the most significant declines. Investors are dubious about whether substantial AI spending will ultimately prove profitable due to persistent high inflation driving up borrowing costs.

Wall Street concluded the week on a downward trajectory on Friday, October 16, with AI-related technology stocks such as CoreWeave and Broadcom facing renewed market pressure. CoreWeave, a leading data center operator, suffered substantial losses as its bonds dropped sharply, with yields surging above 15%. Over the week, long-short funds, or stock pickers, incurred losses every day, with a total of 2.9% for the week up to Thursday.

The year-to-date performance of these funds stands at a gain of 14.3%. Global equities experienced net selling on Thursday, driven by ongoing risk re-evaluations and long positions surpassing short covers. Goldman Sachs reported that global AI stocks collectively were sold by long-short fund managers over six consecutive sessions.

On Thursday, hedge funds across various strategies saw a sharp retreat, with stock pickers globally losing 0.9%, Asia-focused managers down by 2.6%, and tech-focused funds down by 2%. Systematic long-short managers and multi-strategy funds also dropped by approximately 1%. Analysts attribute the sell-off to a high-velocity unwind of a widely held trade, exacerbated by unexpectedly high US inflation data, which has prompted market reassessments of interest rate trajectories.

Semiconductor and AI supply chain stocks bore the brunt of the sell-off, with South Korea's Kospi index plummeting 8% to a six-month low on Thursday, and Taiwan shares falling by more than 3%. This latest decline marks the third instance of three broad strategies falling more than 80 basis points in a single day this year, occurring on February 4, July 28, and October 15.

Asia-focused stock pickers have lost 6.8% for the first half of the month, erasing over half of their gains from their late-June peak when they had risen more than 40% for the year, according to Goldman Sachs. The market's reaction underscores the extent to which the hedge fund industry has been trading the same underlying theme, despite diverse portfolio compositions.