Key Takeaways
- • Asia-focused equity hedge funds are on track for their worst monthly drawdown on record, declining 18.6% on average through July 28, according to Goldman Sachs prime brokerage data released this week.
- • Funds that capitalized on early AI hardware bets—particularly South Korean chipmakers SK Hynix and Samsung Electronics—are unwinding crowded positions after gaining over 100% in the first half of 2026, reversing 21 percentage points of year-to-date gains since peaking at 40% on July 22.
- • South Korea's Kospi benchmark fell nearly 11% on Tuesday in its worst session in approximately five months, as regional semiconductor stocks faced sustained selling pressure amid investor skepticism over AI spending returns and forced deleveraging.
- • Hedge fund de-grossing reached record levels, with Goldman Sachs reporting eight consecutive days of exposure reduction through July 27 and the largest five-day cumulative de-grossing ever recorded, focused on Taiwan, Korea, Japan, and China equities.
- • Vikas Pershad, portfolio manager for Asian equities at M&G Investments, characterized the selloff as "the biggest unwind we've ever seen" in market capitalization terms, reflecting unprecedented forced liquidations across the region.
Summary
Asia-focused stock-picking hedge funds are experiencing their most severe monthly drawdown on record as a sharp reversal in artificial intelligence-related equities has erased substantial first-half gains. According to a Goldman Sachs prime brokerage note distributed to clients on July 30, Asia-focused fundamental long-short funds have fallen 18.6% on average through July 28, 2026. The decline represents a dramatic turnaround for strategies that were among the world's top performers in the first half of the year.
The catalyst for this reversal centers on the unwinding of crowded positions in AI hardware stocks that had driven exceptional returns. Hedge funds positioned heavily in South Korean chipmakers SK Hynix and Samsung Electronics, along with other semiconductor leaders, had achieved gains exceeding 100% through mid-year. However, the sector-wide selloff has forced a rapid retreat. Since peaking at 40% year-to-date gains on July 22, these funds have surrendered 21 percentage points as the AI stock rout has accelerated. The deterioration reflects a broader market reassessment of returns on massive capital expenditures directed toward AI infrastructure.
Regional equity markets have experienced severe pressure amid the hedge fund liquidations. South Korea's Kospi benchmark index declined nearly 11% on Tuesday—its worst session in approximately five months—as semiconductor stocks faced sustained selling. The pressure has extended across the broader region, with Taiwan, Korea, Japan, and China equities experiencing concentrated selling activity. Goldman Sachs data reveals that Asian hedge funds have reduced exposure for eight consecutive trading days through July 27, with the five-day cumulative de-grossing reaching the largest level ever recorded. This forced deleveraging underscores the extent to which funds are operating to manage risk and stem losses.
Market participants have characterized the current unwind as historically significant. Vikas Pershad, portfolio manager for Asian equities at M&G Investments, stated that "in market cap terms, this is the biggest unwind we've ever seen," highlighting the unprecedented scale of position reduction across the region. The magnitude of forced selling reflects the concentration of hedge fund exposure to AI-related themes and the rapid pivot from conviction-driven positioning to defensive positioning driven by margin pressures and risk management imperatives.
The catalyst for this reversal centers on the unwinding of crowded positions in AI hardware stocks that had driven exceptional returns. Hedge funds positioned heavily in South Korean chipmakers SK Hynix and Samsung Electronics, along with other semiconductor leaders, had achieved gains exceeding 100% through mid-year. However, the sector-wide selloff has forced a rapid retreat. Since peaking at 40% year-to-date gains on July 22, these funds have surrendered 21 percentage points as the AI stock rout has accelerated. The deterioration reflects a broader market reassessment of returns on massive capital expenditures directed toward AI infrastructure.
Regional equity markets have experienced severe pressure amid the hedge fund liquidations. South Korea's Kospi benchmark index declined nearly 11% on Tuesday—its worst session in approximately five months—as semiconductor stocks faced sustained selling. The pressure has extended across the broader region, with Taiwan, Korea, Japan, and China equities experiencing concentrated selling activity. Goldman Sachs data reveals that Asian hedge funds have reduced exposure for eight consecutive trading days through July 27, with the five-day cumulative de-grossing reaching the largest level ever recorded. This forced deleveraging underscores the extent to which funds are operating to manage risk and stem losses.
Market participants have characterized the current unwind as historically significant. Vikas Pershad, portfolio manager for Asian equities at M&G Investments, stated that "in market cap terms, this is the biggest unwind we've ever seen," highlighting the unprecedented scale of position reduction across the region. The magnitude of forced selling reflects the concentration of hedge fund exposure to AI-related themes and the rapid pivot from conviction-driven positioning to defensive positioning driven by margin pressures and risk management imperatives.
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