Key Takeaways
- • Quantitative hedge funds posted a -3.7 standard deviation single-day decline on Thursday, their worst day since August 19, after being the only strategy in Goldman Sachs Prime's book with positive returns the previous day (up 0.5%, year-to-date 21.7%).
- • Asian fundamental long-short managers lost 2.6% on Thursday, pushing monthly drawdowns to -6.8% and year-to-date returns down to 16.7% from a June peak of 40%, according to Goldman Sachs Prime.
- • Taiwan recorded a single-day foreign outflow of approximately $9.3 billion, an all-time high, while hedge funds net sold global AI stocks for five consecutive sessions from October 8 to 14, reversing all net buying since the start of 2025.
- • Goldman Sachs Prime's overall gross leverage held at 310.3%, near five-year highs, with Taiwan positioning at the 99th percentile of its five-year range, leaving substantial room for further deleveraging.
- • Goldman analysts argue that VaR models systematically underestimate extreme risk, while the trading desk sees only localized oversold conditions, with financing constraints on the AI capex cycle remaining a substantive issue.
Summary
Hedge funds suffered a simultaneous multi-strategy sell-off on Thursday, October 16, the third such episode in ten months, according to Goldman Sachs Prime brokerage data. Quantitative funds absorbed a -3.7 standard deviation shock, their worst single-day performance since August 19. The move reversed the prior day's gains, when systematic funds had been the only strategy in Goldman's book to post positive returns, rising 0.5% with year-to-date gains of 21.7%. Equity multi-strategy books, running at 4.5x leverage, fell approximately 1.2% on the day.
Goldman's tracking data showed the Momentum factor down 3.4 standard deviations as of 10:30 a.m. Thursday, with Crowded Longs down 1.8 standard deviations and Crowded Shorts squeezed higher by 1.2 standard deviations. Marco Laicini of Goldman Sachs Prime described the pattern as "broader deleveraging," in which managers cut exposure on both sides of the book. The Goldman Sachs HF VIP long-short pair fell 115 basis points on the day, bringing cumulative losses to roughly 10% since the correction began on October 8.
Asia was the epicenter. Himanshu Deshmukh of Goldman Sachs Prime reported that Asian fundamental long-short managers lost 2.6% on Thursday, with monthly losses widening to -6.8% and year-to-date returns falling to 16.7%, back to July lows. Selling was concentrated in South Korea and Taiwan and was dominated by the unwinding of AI-related long positions. South Korea's net positioning has fallen 75 basis points this month to 3.64%, at the 32nd percentile of the past year, which Goldman interprets as substantially cleared. Taiwan's exposure is more concerning: positioning sits at the 94th percentile over one year and the 99th percentile over five years. Foreign capital left Taiwan at a single-day pace of roughly $9.3 billion (about NT$300 billion), a record.
Vincent Lin, head of Goldman Sachs Prime brokerage, reported that hedge funds net sold global AI stocks for five consecutive trading days from October 8 to 14, erasing all net buying since the start of 2025. Global AI net selling was the second-largest in a year, trailing only July's crash. The KOSPI entered bear market territory and Seoul triggered circuit breakers, according to the report. Global AI allocation stands at 26.1% of single-stock net market value, down from a June peak of 31.7%, at the 49th percentile over one year but the 83rd over three years.
Goldman's assessment is cautious. Gross leverage declined only 0.4 percentage points to 310.3%, while net leverage fell 1.5 points to 73.3%. Rachel Hu of Goldman's Asia team noted that Taiwan trading feedback shows less capitulation than in July, implying further selling may lie ahead. Rich Privorotsky of Goldman's Delta-One desk summarized the dynamic: "The market is discovering that compute demand can grow exponentially, but the capital available to finance it cannot." Goldman's London sales team, by contrast, sees localized oversold conditions given reduced AI exposure and low active net positioning, though financing constraints remain substantive. JPMorgan has argued for buying the dip, but Goldman characterized the episode as closer to the beginning of deleveraging than its end, with Friday's options expiration expected to remove some positive gamma support.
Goldman's tracking data showed the Momentum factor down 3.4 standard deviations as of 10:30 a.m. Thursday, with Crowded Longs down 1.8 standard deviations and Crowded Shorts squeezed higher by 1.2 standard deviations. Marco Laicini of Goldman Sachs Prime described the pattern as "broader deleveraging," in which managers cut exposure on both sides of the book. The Goldman Sachs HF VIP long-short pair fell 115 basis points on the day, bringing cumulative losses to roughly 10% since the correction began on October 8.
Asia was the epicenter. Himanshu Deshmukh of Goldman Sachs Prime reported that Asian fundamental long-short managers lost 2.6% on Thursday, with monthly losses widening to -6.8% and year-to-date returns falling to 16.7%, back to July lows. Selling was concentrated in South Korea and Taiwan and was dominated by the unwinding of AI-related long positions. South Korea's net positioning has fallen 75 basis points this month to 3.64%, at the 32nd percentile of the past year, which Goldman interprets as substantially cleared. Taiwan's exposure is more concerning: positioning sits at the 94th percentile over one year and the 99th percentile over five years. Foreign capital left Taiwan at a single-day pace of roughly $9.3 billion (about NT$300 billion), a record.
Vincent Lin, head of Goldman Sachs Prime brokerage, reported that hedge funds net sold global AI stocks for five consecutive trading days from October 8 to 14, erasing all net buying since the start of 2025. Global AI net selling was the second-largest in a year, trailing only July's crash. The KOSPI entered bear market territory and Seoul triggered circuit breakers, according to the report. Global AI allocation stands at 26.1% of single-stock net market value, down from a June peak of 31.7%, at the 49th percentile over one year but the 83rd over three years.
Goldman's assessment is cautious. Gross leverage declined only 0.4 percentage points to 310.3%, while net leverage fell 1.5 points to 73.3%. Rachel Hu of Goldman's Asia team noted that Taiwan trading feedback shows less capitulation than in July, implying further selling may lie ahead. Rich Privorotsky of Goldman's Delta-One desk summarized the dynamic: "The market is discovering that compute demand can grow exponentially, but the capital available to finance it cannot." Goldman's London sales team, by contrast, sees localized oversold conditions given reduced AI exposure and low active net positioning, though financing constraints remain substantive. JPMorgan has argued for buying the dip, but Goldman characterized the episode as closer to the beginning of deleveraging than its end, with Friday's options expiration expected to remove some positive gamma support.
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