Global hedge funds suffer steep losses as AI trade unwinds, Asia funds hit hardest

Global hedge funds suffered steep losses this week as a sharp unwinding of artificial intelligence-related investments battered portfolios. Asia-focused stock pickers bore the brunt of the selloff, according to a Goldman Sachs prime brokerage note cited by Reuters.

Investors have increasingly questioned whether massive investments in artificial intelligence will generate returns quickly enough to justify the spending, while elevated inflation has kept borrowing costs high and raised concerns about further monetary tightening.

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Global fundamental long-short hedge funds, which seek to profit by buying stocks expected to rise and betting against those expected to fall, recorded losses on every trading day of the week through October 15. The strategy lost 2.9% during the period, although returns remained positive at 14.3% for the year to date, Goldman Sachs data showed, Reuters reported.

Pressure intensified on Wednesday, October 15, as hedge funds across strategies retreated sharply. Global fundamental long-short funds lost 0.9%, while Asia-focused stock pickers fell 2.6% and technology-focused funds declined 2%.

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Global systematic long-short managers and multi-strategy funds also recorded losses of around 1% each, highlighting the breadth of the selloff across hedge fund strategies.

Hotter-than-expected US inflation data added to investor concerns by increasing expectations of further interest rate hikes. The prospect of tighter monetary policy weighed particularly heavily on semiconductor stocks and companies linked to the artificial intelligence supply chain, which have benefited from strong investment in AI infrastructure.

The scale of the recent volatility has been unusual. Goldman Sachs noted that from the Covid-19 pandemic through the end of 2025, its three broad hedge fund strategies had never simultaneously suffered daily losses exceeding 80 basis points. That threshold has been breached three times this year — on February 4, July 28 and October 15 — underscoring the intensity of the recent market turbulence, Reuters reported.

Asia-focused hedge funds bear the brunt

Markets with significant exposure to semiconductor companies have been particularly vulnerable to the reversal in AI-related trades.

South Korea's benchmark KOSPI plunged nearly 8% on Thursday, October 15, closing at a six-month low, while Taiwanese equities also fell more than 3%. The sharp declines reflected mounting concerns over technology valuations and the outlook for companies closely tied to global AI spending.

Asia-focused stock pickers have lost 6.8% in the first half of October, erasing more than half of the gains accumulated since their late-June peak. These funds were up more than 40% for the year at that point, Reuters reported, citing Goldman Sachs.

The losses highlight how quickly positions that had delivered strong returns during the AI-driven market rally can reverse when investors reassess valuations, growth expectations and the cost of capital.

With inflation uncertainty adding to interest-rate concerns, hedge funds with concentrated exposure to technology and semiconductor stocks face mounting pressure to navigate a volatile market environment, even as many strategies remain positive for the year, Reuters reported.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)