Tech selloff wipes out hedge fund gains, prompting risk cuts and layoffs

A major global equity selloff, primarily driven by technology stocks, has erased year-to-date gains for numerous hedge funds, prompting some managers to reduce risk and cut investment teams. Despite a brief post-midterm rally, the market rout on Thursday exacerbated losses across the industry, with technology-focused funds suffering the most.

Equity long-short funds specializing in tech declined by over 4% on the day, leaving annual returns essentially flat, according to Goldman Sachs estimates. This stands in stark contrast to a peak gain of 24% in June prior to the AI-driven sell-off. Fund managers worldwide witnessed an average loss of 1.3% on Thursday, with multi-strategy managers experiencing an additional 1.4% decline.

At the heart of the industry's current woes is the New York-based multi-strategy fund, Walleye Capital, which announced it would reduce its equity long-short business and significantly cut its equity investment team in a recent investor letter. Following their worst month since March 2020, amidst an already challenging year, the fund stated that it has thoroughly examined every facet of its operations and plans to return a portion of its capital.

Large multi-manager hedge fund platforms have been trimming leverage and laying off underperforming teams in recent weeks, with more likely if declines persist. The post-US midterm market turmoil extended losses, following a tough October marked by elevated AI-related borrowing costs and concerns over returns. The Nasdaq 100 index, which includes many tech giants, plummeted 6.6% last month, marking its biggest monthly drop in 18 months.

JPMorgan estimates global hedge funds suffered a 3% loss during October. The rush to de-risk ahead of the US midterms left many hedge funds chasing Wednesday's relief rally, only to be caught off guard the following day, according to John Flood, a partner and managing director at Goldman Sachs. Hedge funds are liquidating pockets of the market (hyperscalers) they had recently acquired, he explained.

Research firm PivotalPath highlighted an increasing degree of overlap among the 10 largest multi-strategy hedge funds, suggesting that their unwinding could impact many of the same securities.