July proved to be a challenging month for many hedge funds, especially those heavily invested in artificial intelligence (AI) related stocks. A broad tech selloff, fueled by doubts about the sustainability of massive capital spending in the AI sector, led to widespread losses. South Korean memory chip maker SK Hynix Inc. dropped over 30%, while Japan's Kioxia Holdings Corp. lost almost half its value, and Chinese gauges tracking smaller domestic stocks slumped nearly 20%. Goldman Sachs Group Inc.'s prime brokers indicated that Asia-based stock pickers experienced their worst month on record.
The turmoil was particularly acute for funds like Leopold Aschenbrenner's Situational Awareness, which suffered a 67% loss in July. This severe downturn forced the fund to sell billions of dollars in tech investments, with its assets falling from approximately $45 billion to around $10 billion. Ken Griffin's Citadel notably stepped in, acquiring a substantial portion of these positions at a discount of over 10%, which reportedly helped stabilize the market in the last two trading days of July. Many other hedge funds that had made significant bets on chip makers and AI stocks also saw double-digit losses.
Despite the widespread losses among rivals, Citadel's flagship Wellington fund gained 6% in July, bringing its year-to-date return to 12%. Its tactical trading fund surged 11% in July, achieving a 27% year-to-date return, while its stock-focused equities fund climbed 14.2%, also reaching 27% for the year. Funds with more diversified holdings, such as Arrowpoint Investment Partners' multi-manager, multi-strategy fund, fared better, experiencing only low single-digit slips after having proactively slashed risk by about 30% between May and June. However, multi-strategy hedge funds, on average, still recorded a 2.2% loss in July.
The struggles extended beyond specific funds, with Hel Ved Capital Management, E20 Capital, Valliance Asset Management, and WT Asset Management all reporting double-digit losses for the month, despite being some of the best performers in the first half of the year. JPMorgan analysis highlighted that while global equity long-short hedge funds experienced their second-worst monthly performance in four years, Asia-Pacific equity long-short managers endured the steepest declines with average losses of 9.4%. Quantitative equity hedge funds also struggled, posting average losses of around 5%, and remain the industry's most leveraged strategy, with estimated average leverage at approximately 450%.
Despite the July meltdown, interest in hedge fund allocation remains high, according to a Barclays survey. Investors are still eager to commit capital, with the integration of AI into the investment process being a significant theme. However, investors also acknowledged market vulnerability and the challenges hedge funds face. JPMorgan also noted a recurring seasonal trading pattern where hedge funds typically reduce equity exposure in July by exiting underperforming positions before rebuilding those holdings later in the year, with this year's deleveraging being the most pronounced since 2022.
