Asia hedge funds are on track to experience unprecedented monthly losses as the AI trade begins to unravel
Goldman Sachs reports that hedge funds concentrating on Asia are facing unprecedented monthly losses, as the reversal of AI trades significantly diminishes the gains made in the first half of the year.
Asia-focused stock-picking hedge funds are heading towards their most challenging monthly performance on record, following a sudden downturn in artificial intelligence-related investments that has wiped out a considerable share of the profits gained earlier this year, as indicated in a Goldman Sachs prime brokerage note sent to clients this week.
The investment bank reported that Asia-focused fundamental long-short hedge funds experienced an average decline of 18.6% this month, up to July 28. The funds distinguished themselves as some of the top-performing investors globally in the first half of the year, thanks to their early investments in AI hardware companies, such as South Korean chipmakers SK Hynix and Samsung Electronics, with several achieving returns exceeding 100%.
Goldman Sachs reported that the recent market downturn has erased 21 percentage points of the funds’ year-to-date gains, following a peak return of 40% on July 22, highlighting the rapid and significant nature of the reversal.
The bank indicated that the once heavily crowded AI positions, which contributed to robust returns in the first half, have now emerged as the main source of losses. Funds with increased exposure to AI-related investments are experiencing the most significant drawdowns.
The losses have aligned with a widespread sell-off in Asian semiconductor stocks, primarily driven by South Korea, as investors have grown more skeptical about the returns on substantial AI investments while leveraged positions were being unwound throughout the market.
On Tuesday, South Korea’s benchmark Kospi index experienced a decline of nearly 11%, representing its most significant single-day drop in approximately five months.
Goldman Sachs reported that hedge funds have been actively decreasing their market exposure, cutting back on positions for eight straight trading sessions leading up to July 27. The bank observed that the most recent five-day cumulative decrease in gross positions was the largest ever recorded.
Selling has primarily occurred in Taiwan, South Korea, Japan, and China, as investors sought to secure profits and mitigate portfolio risk in response to increased market volatility.
Commenting on the scale of the retreat, Vikas Pershad, portfolio manager for Asian equities at M&G Investments, characterized the sell-off as the largest market-cap unwind he has ever witnessed, noting that the substantial trading volumes that propelled the rally have also hastened the market’s decline.
