Asia-focused hedge funds suffered widespread losses in July as a sharp reversal in AI-related stocks triggered what Goldman Sachs' prime brokerage business described as the worst month on record for regional equity long-short managers. Several top-performing funds from the first half of the year posted double-digit declines, including strategies managed by Hel Ved Capital Management, E20 Capital, Valliance Asset Management, and WT Asset Management. Goldman estimated that Asia-focused long-short equity hedge funds lost around 15% in July based on aggregate client positioning, with some funds like Keystone Investors Pte's hedge fund retreating 12% and WT China Fund losing 17% through July 17th.
The sell-off was driven by investors questioning the sustainability of heavy capital spending in the AI sector. Key AI beneficiaries, such as South Korean memory chip maker SK Hynix, which had quadrupled in the first half, fell by more than 30% in July, and Japan's Kioxia Holdings, which surged over 750% previously, almost halved in value. This dramatic reversal led to significant de-risking, with Asian hedge funds reducing exposure for eight straight trading days by July 27th, marking the largest cumulative de-grossing on record according to Goldman Sachs. Crowded AI bets that fueled first-half gains were identified as the primary cause of these steep losses, particularly for funds with higher exposure to AI themes.
The turmoil extended beyond Asia, with the AI-focused hedge fund Situational Awareness reportedly losing 67% in July, forcing the liquidation of billions of dollars in technology holdings. Its assets fell from approximately $45 billion to around $10 billion. In contrast, managers with broader investment mandates and diversified portfolios generally fared better. Singapore-based Arrowpoint Investment Partners, which had reduced portfolio risk by about 30% between May and June, reported only a low single-digit decline. Similarly, Quantedge Capital generated positive performance in July through gains in commodities, currencies, and equity trading, while Kings Court Capital's Asia-Pacific equity hedge fund also finished the month in positive territory after reducing exposure to overheated sectors.
