Key Takeaways
- • Morgan Stanley's client report, cited by the Wall Street Journal, found equity-focused hedge funds made their largest cut to active investments in over a decade last October, with market risk exposure down roughly 9% since June.
- • Over 40% of equity-focused hedge funds were flat or negative for the year as of the end of October, according to Morgan Stanley.
- • Goldman Sachs reported that technology, media and telecom (TMT) hedge funds lost more than 4% in a single day on the 5th, surrendering all cumulative 2026 gains that had once reached 24%.
- • Losses were driven by AI-related long positions and short positions in companies seen as vulnerable to AI, with both sides of AI-linked trades faltering.
- • Samlyn Capital (about $7 billion AUM) and Engineers Gate (about $4 billion AUM) cut staff and strategies after poor performance, and Lone Pine Capital posted an 8.8% October loss that left it down 7.5% year to date before fees.
Summary
Hedge funds on Wall Street are scaling back investments and personnel after a sharp sell-off in artificial intelligence-related stocks. Funds that posted double-digit returns in the first half of the year have swung to losses, and market participants have raised concerns about a feedback loop in which forced selling to limit losses pushes prices lower and prompts further cuts.
According to the Wall Street Journal, Morgan Stanley analyzed in a client report that equity-focused hedge funds, which select individual stocks, made their most significant reduction in active investments in more than a decade last October. Their market risk exposure fell about 9% since June. As of the end of October, more than 40% of these funds were flat or negative for the year. Many funds were already struggling before the post-midterm election market decline.
Goldman Sachs reported that hedge funds focused on technology, media and telecommunications lost more than 4% in a single day on the 5th, effectively erasing all cumulative gains for the year, which had at one point reached 24% before the summer AI-stock sell-off began. Multi-strategy funds fell 1.4% that day.
Strategies positioned on both AI winners and losers have faltered. Long positions in AI-related stocks bought in anticipation of gains declined, while short positions in companies expected to suffer from AI expansion rose, producing losses on both sides.
Lone Pine Capital illustrates the reversal. Its hedge fund returned more than 40% in the first half but reported a sharp turnaround in the third quarter, with an 8.8% loss in October that left its year-to-date return at -7.5% as of the end of October, before fees. In an investor letter, the firm attributed the losses to declines in AI-related stocks and short positions in companies it views as vulnerable to AI.
Poor performance has prompted restructuring. Samlyn Capital, which manages about $7 billion, is winding down most of its non-financial investments, including industrial, technology and retail holdings, and is concentrating on financial stocks while reducing senior investment staff overseeing non-financial sectors. The firm was down about 5% for the year through October but plans to reinvest in financial stocks or hold cash rather than return capital to investors. Engineers Gate, managing about $4 billion, significantly downsized its team combining quantitative analysis and human judgment after losing 5.5% from October 1 to 23. Its investor letter stated, "The team's performance was insufficient to justify continuing operations in its current form."
Analysts warn that these cuts could amplify market instability. If multiple funds holding similar stocks sell simultaneously, losses spread across the sector, and for leveraged positions, falling collateral values can trigger margin calls and force further asset sales. Arni Capital, which invests in bonds, reportedly reduced its holdings significantly while meeting additional collateral demands from trading banks. Some analysts argue that preemptive reductions in leveraged positions in recent weeks limited larger losses on the 5th. Third Point founder Dan Loeb wrote on X, "Hug your hedge fund manager."
According to the Wall Street Journal, Morgan Stanley analyzed in a client report that equity-focused hedge funds, which select individual stocks, made their most significant reduction in active investments in more than a decade last October. Their market risk exposure fell about 9% since June. As of the end of October, more than 40% of these funds were flat or negative for the year. Many funds were already struggling before the post-midterm election market decline.
Goldman Sachs reported that hedge funds focused on technology, media and telecommunications lost more than 4% in a single day on the 5th, effectively erasing all cumulative gains for the year, which had at one point reached 24% before the summer AI-stock sell-off began. Multi-strategy funds fell 1.4% that day.
Strategies positioned on both AI winners and losers have faltered. Long positions in AI-related stocks bought in anticipation of gains declined, while short positions in companies expected to suffer from AI expansion rose, producing losses on both sides.
Lone Pine Capital illustrates the reversal. Its hedge fund returned more than 40% in the first half but reported a sharp turnaround in the third quarter, with an 8.8% loss in October that left its year-to-date return at -7.5% as of the end of October, before fees. In an investor letter, the firm attributed the losses to declines in AI-related stocks and short positions in companies it views as vulnerable to AI.
Poor performance has prompted restructuring. Samlyn Capital, which manages about $7 billion, is winding down most of its non-financial investments, including industrial, technology and retail holdings, and is concentrating on financial stocks while reducing senior investment staff overseeing non-financial sectors. The firm was down about 5% for the year through October but plans to reinvest in financial stocks or hold cash rather than return capital to investors. Engineers Gate, managing about $4 billion, significantly downsized its team combining quantitative analysis and human judgment after losing 5.5% from October 1 to 23. Its investor letter stated, "The team's performance was insufficient to justify continuing operations in its current form."
Analysts warn that these cuts could amplify market instability. If multiple funds holding similar stocks sell simultaneously, losses spread across the sector, and for leveraged positions, falling collateral values can trigger margin calls and force further asset sales. Arni Capital, which invests in bonds, reportedly reduced its holdings significantly while meeting additional collateral demands from trading banks. Some analysts argue that preemptive reductions in leveraged positions in recent weeks limited larger losses on the 5th. Third Point founder Dan Loeb wrote on X, "Hug your hedge fund manager."
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