Hedge funds focusing on stock-picking based on company fundamentals suffered major losses on Monday due to a sudden decline in global tech stocks. This drop was sparked by the launch of an affordable Chinese AI model that threatened U.S. tech giants. According to a Goldman Sachs trading update, these funds saw a significant 1.1% loss in one day, a notable drop for funds that usually achieve annual returns of around 15%.
Goldman Sachs didn’t disclose exact dollar amounts for the hedge funds they track, but data from BarclayHedge, a hedge fund research group, suggests that the losses could run into billions. As of the third quarter of 2024, hedge funds that engage in long and short positions managed $176.7 billion, while long-only hedge funds had $672.9 billion in assets.
Despite this, the stock-picking hedge funds have gained 1.5% so far this year, as they invest based on a company’s financial health rather than relying on price charts. A large portion of these funds had invested heavily in major tech stocks, particularly those in the “Magnificent 7” group, which includes Nvidia, Apple, and Microsoft. The collapse in these stocks’ values hit these hedge funds hard on Monday.
Nvidia, one of the leading tech stocks, experienced a 17% drop on Monday, resulting in a $600 billion loss in market value—the largest single-day drop in history. This massive decline in Nvidia’s stock triggered huge profits for short-sellers, who made $6.6 billion in a single day—the largest ever for that stock. Other short-sellers betting against companies like Broadcom, Super Micro, Equinix, and Vistra also made substantial profits, with Broadcom short-sellers earning over $2 billion.
Goldman Sachs noted that Monday’s sell-off was the largest they’ve seen in six months and one of the biggest in the past five years. Hedge funds continued to exit tech stocks for the third day in a row, with many closing long positions that had become too risky to hold onto.
On the other hand, systematic hedge funds, which rely on algorithms to trade based on market volumes and charts, had a positive day, gaining 1.7%. These funds had already started shorting markets earlier in the week and pulled back from volatile stocks, allowing them to benefit from the downturn in tech shares.
This sharp downturn in tech stocks, triggered by the rise of China’s AI technology, highlights the volatility in the global tech sector and the risks hedge funds face when heavily invested in these stocks.
