Asia-Focused Hedge Funds Face Record Monthly Loss on AI Stock Rout, Goldman Sachs Reports

Asia-focused equity hedge funds are on pace for their largest monthly drawdown on record, driven by a severe selloff in previously high-flying artificial intelligence stocks. A Goldman Sachs report indicates that the sharp reversal has wiped out a substantial portion of the gains these funds accumulated in the first half of the year.

A Sharp Reversal in Fortunes

According to a prime brokerage note sent to clients, Asia-focused fundamental long-short funds have declined by an average of 18.6% this month through July 28. The losses represent a dramatic turnaround for funds that were among the world's top performers earlier in the year, with some having pocketed gains of more than 100%.

Goldman Sachs noted that these funds have now surrendered 21 percentage points of their year-to-date gains, which had peaked at 40% as recently as July 22. The bank stated that crowded AI bets that fueled first-half performance are now "driving outsized month-to-date drawdown."

Market Turmoil Sparks De-Risking

The reversal in hedge fund performance coincides with a broader rout in Asian semiconductor stocks, as investors question the returns on massive AI-related capital expenditures. The selloff was particularly acute in South Korea, where the benchmark Kospi index tumbled nearly 11% on Tuesday in its worst session in about five months.

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In response to the market turmoil, hedge funds have been aggressively taking profits and reducing risk. Goldman Sachs reported that Asian hedge funds have cut their exposure for eight consecutive trading days as of July 27, with the "five-day cumulative de-grossing" reaching the largest level on record. The selling has been concentrated in Taiwan, Korea, Japan, and China.

'Biggest Unwind We've Ever Seen'

The scale of the reversal highlights the risks of concentrated bets in popular sectors. The same AI hardware leaders that drove performance, including South Korean chipmakers SK Hynix and Samsung Electronics, are now at the center of the decline.

"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, in comments to Reuters. Pershad added that the significant trading volumes that amplified the rally in AI-related stocks have now accelerated the decline as leveraged positions are unwound.