As the U.S. stock market plummets, hedge funds also 'white flag'... Largest position reduction in over 10 years

(New York = Yonhap News) Correspondent Soo-jeong Lim = Even large Wall Street hedge funds are reeling from the plunge in artificial intelligence (AI)-related stocks that hit the New York stock market.

Funds that once boasted double-digit returns are experiencing losses one after another, and are closing down their investment positions and reducing their workforce.

According to the Wall Street Journal (WSJ) on the 6th (local time), Morgan Stanley analyzed in its latest client report that the active reduction in positions by stock selection hedge funds last month reached the highest level in over 10 years.

These funds were found to have reduced their exposure to the stock market by about 9% since last June.

As of the end of October, more than 40% of stock selection hedge funds were found to have had flat or negative returns compared to the beginning of the year.

This can be interpreted as the impact of hedge funds that had bet on the rise of AI-related stocks suffering losses due to the sharp drop in stock prices, as well as losses from short selling of companies expected to be hit by the spread of AI.

Hedge funds' losses have been widening further this month.

In particular, after the 'blue tsunami' in which the Democratic Party took control of both the Senate and the House of Representatives in the midterm elections, selling spread mainly in artificial intelligence-related stocks, and the market capitalization of stocks in the Nasdaq composite index evaporated by about $2.5 trillion the day before, recording the largest single-day decline ever.

According to a report delivered by Goldman Sachs to customers, hedge funds that invest heavily in the technology, media, and telecommunications (TMT) sector recorded a loss of more than 4% the previous day alone.

These funds posted returns of up to 24% compared to the beginning of the year before the sell-off in AI-related stocks began in earnest this summer, but the recent plunge gave away virtually all of this year's accumulated profits.

The worsening performance of large hedge funds is leading to workforce reductions and investment strategies.

Samlin Capital, which manages about 7 billion dollars (about 9.5 trillion won), recently decided to liquidate most of its stock investment positions in industries other than financial industries, such as industrial goods, technology stocks, and retail, and focus on investing in financial stocks. Accordingly, senior investment analysis personnel in charge of industries other than the financial industry are also being reduced.

The company's flagship fund is said to have recorded a loss of about 5% compared to the beginning of the year as of the end of October.

Engineer's Gate, which manages about $4 billion, also drastically reduced its 'quantitative' investment organization, which combines quantitative analysis and the judgment of human managers, as investment losses expanded in the aftermath of the plunge in technology stocks last October.

The company recorded a loss of 5.5% from October 1 to 23, and explained that the performance of its investment organization did not meet internal standards.

The worsening performance of large hedge fund Lone Pine Capital is also notable.

Lone Pine Capital, which manages about $19 billion, posted a return of more than 40% in the first half of the year, but suffered a loss of 8.8% in October alone, bringing its cumulative return this year to minus 7.5%.

There are also concerns in the market that simultaneous investment reductions by hedge funds could further increase downward pressure on the stock market.

This is because, in order to reduce losses, several funds sell similar stocks at once, encouraging a decline in stock prices, which in turn can lead to further reductions in positions.

In fact, some hedge funds are said to have sold off a large number of their assets to respond to additional margin requests (margin calls) from their banks.

However, there is also an analysis that if hedge funds had not previously reduced leveraged investments using borrowing in recent weeks, the losses resulting from the previous day's plunge in the stock market would have been even greater.

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