Global hedge funds hit by sharp losses as AI trades unravel

Global hedge funds have absorbed steep losses this week as investors unwound crowded bets on artificial intelligence, triggered by stubborn inflation readings and mounting scepticism over the returns on massive corporate capital spending.

Funds focused on Asian equities bore the brunt of the reversal. Those managers dropped 6.8% across the first half of October, erasing more than half of the returns built up since their peak in late June, according to prime brokerage data from Goldman Sachs.

What triggered the sell-off

For much of the year, portfolios clustered heavily around semiconductor manufacturers, server infrastructure providers and software developers tied to the AI boom. That trade has come under acute strain as traders question how rapidly enterprise adoption will translate into bottom-line profits.

At the same time, stronger-than-projected United States inflation figures have pushed back expectations of looser monetary policy. The prospect of borrowing costs remaining higher for longer hit high-valuation hardware and chipmakers that had powered global market rallies throughout the first half of the year.

The International Monetary Fund has separately cautioned that the intricate web of financing behind the generative AI surge leaves broader equity markets vulnerable to sharp corrections, warning that losses could spill across global borders if valuation expectations break down.

How different strategies performed

Selling accelerated sharply in the middle of the week, causing losses across every major hedge fund style. Global fundamental long-short funds — which buy equities expected to appreciate and short those expected to decline — fell on every trading day of the week through 15 October, dropping 2.9% across that span.

Goldman Sachs noted that simultaneous daily retreats exceeding 80 basis points across its three broad hedge fund benchmarks were virtually unseen in recent years. Yet that threshold has been breached three times already this calendar year: on 4 February, 28 July and 15 October.

Asian markets take the strain

Because Asian bourses house the core foundries, memory makers and assembly houses of the AI supply chain, local benchmarks suffered immediate fallout. South Korea's benchmark KOSPI tumbled nearly 8% on 15 October to touch a six-month trough, while Taiwan's stock index fell by more than 3% in tandem.

Despite the brutal week, broader fund performance remains in positive territory for the year. Global fundamental long-short managers sit on net gains of 14.3% year to date, while Asia-focused funds retain double-digit gains after being up more than 40% at their summer highs. Nonetheless, the speed of the reversal highlights how quickly leverage and concentrated positioning can penalise managers when macro conditions turn.