Overview
Asia-focused equity hedge funds that make fundamental long-short bets are on track to post their biggest monthly loss on record, according to a prime brokerage note from Goldman Sachs. The bank reported that, through July 28, these funds have fallen 18.6% on average during the month, after large exposures to AI hardware leaders were hit in a broad selloff.
Gains reversed
Many of the funds that were among the top performers in the first half of the year had taken early, concentrated positions in AI hardware names, including South Korean chipmakers. Those concentrated bets produced outsized returns earlier in the year, with some funds recording gains in excess of 100% before the recent reversal. Goldman Sachs said that since peaking at 40% on July 22, the group has given back 21 percentage points of their year-to-date gains.
Sector- and geography-specific selling
Goldman Sachs highlighted that the crowded AI wagers that powered first-half performance are now "driving outsized month-to-date drawdown," and that funds with larger AI exposures have suffered steeper losses. The bank also noted that selling pressure has been focused on Taiwan, Korea, Japan and China in recent sessions.
Asian semiconductor stocks were particularly affected this week, and South Korea led the regional retreat as investors questioned returns on heavy AI spending and forced unwinds of leveraged positions. South Korea's benchmark Kospi plunged nearly 11% on Tuesday, marking its worst session in about five months.
Hedge fund positioning and flows
Faced with mounting losses and market turbulence, hedge funds moved to lock in profits and reduce risk. Goldman Sachs reported that Asian hedge funds reduced exposure for eight consecutive trading days as of July 27, and that the "five-day cumulative de-grossing" was the largest on record. Heavy trading volumes had amplified gains on the way up and then accelerated the descent on the way down.
Market comment
"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, reflecting the scale of the move and the role of sizable trading volumes in intensifying both the advance and the subsequent retreat.
Implications
The combination of concentrated AI-themed positions, high trading volumes and leveraged exposures has produced a rapid reversal for a segment of Asia-focused equity hedge funds. The data and quotes in the Goldman note underline how theme-driven crowding and de-risking can translate into abrupt drawdowns in regional equities, particularly in semiconductor-heavy markets.
Data points referenced in this article come from a Goldman Sachs prime brokerage note and market observations through July 28.