Hedge funds see broadest losses since COVID as tech sinks

Global hedge funds had one of their worst stretches in years this week as a renewed tech selloff spread through markets. All three major strategies tracked by Goldman Sachs The Goldman Sachs Group, Inc. ↘ 0.36% lost more than 1% on Thursday, October 22. That had not happened since the COVID-era rout, Reuters reported. At the same time, funds have been betting heavily against stocks this month, with bearish wagers near a five-year high, according to Bloomberg.reuters.com+1

Worst day since the pandemic

"If last Thursday felt bad, today has been worse," Goldman's prime brokerage team told clients in a note. The losses hit fundamental equity long-short, systematic and multi-strategy funds alike, Reuters reported. One trigger was Meta Platforms ↗ 0.84%. Its shares had their biggest drop since July after the company said it would issue a new class of shares to help raise funds. Nvidia ↗ 2.78% also fell, and the Nasdaq Composite had its steepest decline since June 5.reuters.com

Goldman estimates that global stock pickers are down 3.8% so far in October but still up 8.8% for the year. Tech-focused funds have lost roughly 10% this month and Asia-focused funds about 9%. Losses on China and technology holdings, along with a squeeze in crowded short positions, hurt returns, Reuters reported. The week before, stock pickers lost money every day in the five sessions to October 15, Reuters reported. Over the same five sessions, funds cut their tech positions at the fastest pace in Goldman data going back to 2016, Bloomberg reported.bloomberg.com+2

Shorts pile up

Goldman's prime brokerage clients have been shorting stocks at about five times the rate they have been buying them. Funds have also been cutting back their overall bullish bets, Bloomberg reported. Short leverage across Goldman's book is in the 99th percentile of the past five years, Financial Advisor magazine reported. Goldman warned that this kind of positioning could lead to a sharp short squeeze if markets rebound.bloomberg.com+1

The selloff comes as US inflation, made worse by war-driven energy prices, combines with doubts about whether AI spending will pay off soon, Bloomberg reported. Funds are still heavily invested in tech despite the selling. The sector makes up 23.5% of Goldman's global prime book, which is in the 90th percentile of the past five years, Hedgeweek reported.hedgeweek.com+1

Bubble concerns

Some managers had already pulled back. Masaki Gotoh, a partner at Tokyo-based TriVista Capital, said his fund had been trimming hardware investments since late June. "I'm actually a very strong believer in AI… But the concentration level is staggering," he told Reuters, pointing to the dotcom bubble. "The circular financing is also a source of some concern."reuters.com