Hedge funds cut equity risk at fastest pace in a decade amid AI selloff

Global equity hedge funds accelerated their risk reduction efforts during the inaugural week of November, as a precipitous decline in artificial intelligence equities precipitated widespread deleveraging across key markets, according to data from Morgan Stanley prime brokerage. The aggregate market value of long/short equity hedge fund positions fell 10.7% since the close of June, indicating a substantial retreat from equity exposure as worries about AI valuations and the ramifications of the U.S. mid-term elections cast a shadow over investor sentiment.

Hedge funds posted negative returns across all major regions during the first week of November, with Asian-based managers suffering an average loss of 1.5%, compared to a decline of over 5% in the MSCI Asia-Pacific Index. The losses diminished Asian hedge funds' year-to-date gains to roughly 2.6%, as opposed to a 6% return among U.S.-based managers.

China-focused equity strategies stood out as an exception, experiencing a 1.1% gain during the week and advancing their annual return to 6.7%. Hong Kong and China were the only two markets to register net buying, buoyed by state-backed intervention that prompted hedge funds to cover short positions in domestic equities, particularly in consumer, semiconductor, and state-owned enterprises.

Elsewhere in Asia, managers concentrated their risk reductions in technology stocks, trimming long positions and augmenting bearish bets, particularly in Taiwan and South Korea. Fundamental equity managers spearheaded the selling, while multistrategy, macro, and quantitative funds decreased short exposure. Asian equity long/short hedge fund leverage fell three percentage points to 124%, nearing the April 2025 low of 123% amid tariff-driven market turmoil.

In the U.S., net leverage among long/short equity managers decreased five percentage points in a single trading session to 42%. The swift reduction in exposure underscores the magnitude of hedge fund deleveraging following October's market upheaval, as managers reevaluate concentrated technology positions and strive to mitigate further losses amidst heightened volatility.