Hedge fund returns worsen this week as tech selloff deepens

By Summer Zhen and Anirban Sen

HONG KONG, New York Oct 23 (Reuters) - Global hedge funds were hit by a fresh tech reckoning this week, with major strategies posting their worst day since the COVID-era market rout.

A renewed selloff in big tech stocks, driven by growing skepticism over the massive AI buildout spending, swept through global markets and dealt a heavy blow to global hedge funds.

"If last Thursday felt bad, today has been worse," Goldman Sachs' prime brokerage team said in a note sent to clients.

All three major strategies tracked by Goldman Sachs lost more than 1% on October 22, a first since the COVID pandemic, with losses spanning fundamental equity long-short, systematic and multi-strategy funds.

One catalyst for the latest selloff was Meta, one of the hyperscalers spending billions to build AI models, after the company said it would issue a new class of shares to help it raise funds.

Meta Platforms slumped 7% on Thursday, its largest drop since July. Nvidia tumbled 4%, while the broader Nasdaq Composite lost 2.6%, its largest decline since June 5.

Asian stocks, from South Korea to China, were also at the center of the selloff, pressured by higher oil prices and fears over hefty AI spending.

The downturn triggered deleveraging among hedge funds, market participants said, as losses in crowded AI-linked trades forced investors to cut exposure and rein in risk.

Global fundamental ​long-short funds, or stock pickers, have dropped 3.8% so far in October, but are still up 8.8% year-to-date, Goldman Sachs estimates.

Performance was weighed down by losses on China and technology holdings, as well as a squeeze in crowded short positions, the bank said.

Tech-focused and Asia-focused hedge funds were among the biggest losers this month through to October 22, down roughly 10% and 9%, respectively, according to Goldman.

Masaki Gotoh, a partner at Tokyo-based TriVista Capital, said the hedge fund had trimmed its hardware investments since late June.

"I'm actually a very strong believer in AI... But the concentration level is staggering. If you go back to the IT dotcom bubble, that had similar types of concentrations and we saw that happen. The circular financing is also a source of some concern," he said.

(Reporting by Summer Zhen and Anirban Sen, additional reporting by Rocky Swift in TokyoEditing by Shri Navaratnam)