Key facts
- Asia-focused equity hedge funds are set for their largest monthly drawdown on record.
- These funds have fallen 18.6% on average in July through the 28th.
- Crowded bets on AI themes, particularly in South Korean chipmakers, have led to significant losses.
- Year-to-date gains have reversed, with funds giving back 21 percentage points since their peak.
- Asian semiconductor stocks experienced a sharp selloff this week, led by South Korea.
- Hedge funds have been reducing exposure for eight straight trading days.
Asia-focused equity hedge funds are experiencing their largest monthly drawdown on record, with an 18.6% average fall through July 28, according to a Goldman Sachs note. This sharp reversal follows substantial gains earlier in the year, driven by concentrated bets on AI hardware leaders such as South Korean chipmakers SK Hynix and Samsung Electronics, where some funds had previously achieved over 100% returns.
Crowded positions in AI themes are now contributing to outsized losses, with funds showing higher exposure to AI suffering steeper declines. The selloff intensified this week, particularly in Asian semiconductor stocks, with South Korea's benchmark Kospi index tumbling nearly 11% on Tuesday, marking its worst session in approximately five months. Investors are increasingly scrutinizing the returns from massive AI spending, leading to unwinding of leveraged positions.
Hedge funds have been actively reducing risk, with Asian funds decreasing exposure for eight consecutive trading days as of July 27. Goldman Sachs noted this represents the largest five-day cumulative de-grossing on record. Selling has been concentrated in Taiwan, Korea, Japan, and China. Vikas Pershad, a portfolio manager at M&G Investments, stated that in market capitalization terms, this is the largest unwind observed, amplified by significant trading volumes on both the ascent and descent.