Crowded trades trigger widespread hedge fund losses as October selloff extends

In October, hedge funds experienced widespread losses due to crowded technology positions, geopolitical events, and credit market volatility, according to a Bloomberg report. Major multistrategy managers saw significant declines, with Balyasny Asset Management falling 3.4% and ExodusPoint Capital Management losing 2.4%. Millennium Management's annual return dropped to 5.7%, prompting a $1.5bn withdrawal from external managers.

Specialist managers like Walleye Capital and Greg Coffey's Kirkoswald Asset Management also faced their worst monthly performances. Credit hedge fund Arini Capital Management suffered a 12% drop, and AI-focused Value Aligned Research Advisors saw a 33% decline. Equity-focused managers also felt the impact, with D1 Capital Partners' stock portfolio down 4.4% and Whale Rock Capital Management's flagship fund declining 8%.

The losses were linked to a broader retreat from AI investments and political instability in Brazil and France. However, some managers managed to post positive returns, including Citadel's Wellington fund up 1.7% and DE Shaw's Composite fund advancing 0.7%. Quantedge was a notable performer, returning 7.2% and 60% for the year. The market turmoil escalated in early November, with the Nasdaq 100 falling 6.4% and the S&P 500 dropping 4.4%.

The extent of the losses raised concerns about diversification and the potential for further risk reductions and forced liquidations to spread beyond crowded technology positions.