Asia hedge funds head for record loss as AI bets unravel

Asia-focused equity long-short hedge funds are on track for their worst month ever, falling 18.6% on average through July 28, as crowded bets on artificial intelligence chip stocks reversed with unusual speed, according to Goldman Sachs The Goldman Sachs Group, Inc. ↘ 0.42% prime brokerage data sent to clients this week.reuters

A Swift Reversal

The drawdown has erased much of the group's gains from what had been a banner year. Goldman Sachs said the funds have given back 21 percentage points of year-to-date performance since peaking at roughly 40% around July 22, with managers most exposed to AI themes suffering the steepest losses. The bank noted that crowded AI positions that powered first-half returns are now "driving outsized month-to-date drawdown".finimize+1

The selloff has been concentrated in semiconductor stocks across Taiwan, South Korea, Japan, and China. South Korea's Kospi fell nearly 11% on Tuesday, July 28, in its worst single session in about five months. Names such as SK Hynix ↘ 3.76% and Samsung Electronics, which had been popular long positions among the funds, were at the center of the unwind.reuters+1

Record De-Grossing

Goldman Sachs reported that Asian hedge funds have reduced exposure for eight consecutive trading days through July 27, with the five-day cumulative de-grossing — the simultaneous cutting of both long and short positions to lower risk — the largest on record. "In market cap terms, this is the biggest unwind we've ever seen," said Vikas Pershad, a portfolio manager for Asian equities at M&G Investments.finimize+1

The forced deleveraging has compounded price moves: as funds sell their most crowded longs and trim related shorts, liquidity thins and stocks move in lockstep, making conditions more difficult for active managers.finimize

Broader Context

The episode coincided with a Federal Reserve decision on Wednesday to hold interest rates steady, a move widely expected by markets. But the more consequential development for investors has been the reassessment of AI-related risk. Capital expenditure guidance from major technology companies continues to rise, suggesting the underlying buildout remains intact — yet markets have shifted from rewarding growth to demanding clarity on who bears the financing risk if AI spending slows.southshorepress

Goldman Sachs's high-beta momentum basket has now surrendered its entire year-to-date gain in a matter of weeks, underscoring how concentration in a narrow set of AI infrastructure names can cut both ways.southshorepress