AI stock selloff hands three main hedge fund strategies losses of more than 1%, a first since the pandemic

The selloff in AI stocks has spread beyond share prices to the returns of the hedge funds that bet on them, according to reports. Citing a client note from Goldman Sachs' prime brokerage unit, the reports said three main strategies tracked by the bank each lost more than 1% on October 22. It was reportedly the first time since the pandemic that all three had lost that much on the same day. Funds focused on technology reportedly fell about 10% in October alone (Investing.com, Yahoo Finance). All of these figures come from media reports, and we have not seen the Goldman note itself.

Spreading across strategies offered no shelter

Hedge funds spread their money across strategies so that when one type loses, another can hold up. Losses of more than 1% in all three main strategies at once mean that this diversification failed on October 22. The likely reading is that the stocks being sold were clustered around a single theme, AI, and that many strategies had positions leaning the same way.

Reuters reported that Goldman's prime brokerage unit described the day in its note as follows.

"Last Thursday" refers to October 15. Funds had already taken heavy losses a week earlier, and October 22 was worse. That judgment comes from the unit that watches money flows most closely, and it amounts to an acknowledgment that the decline is not a one-off shock but is deepening from one week to the next.

Tech-focused funds down about 10% in October

Funds focused on technology were reportedly hit hardest, with October losses put at about 10%. A drop that large before the month is even over shows that the funds that rode the AI rally most directly are also taking the selloff most directly.

At the same time, hedge funds are reportedly cutting their tech exposure at the fastest pace in a decade (Hedgeweek). Selling to stop losses pushes prices down further. Worsening returns and shrinking positions may now be feeding on each other.

Concerns center on "concentration" and "circular financing"

Why did everything fall at once? Masaki Gotoh, a partner at Tokyo-based TriVista Capital, reportedly pointed to how heavily money has piled into AI-related names.

In this view, a small group of AI stocks drove the market's gains and fund positions bunched up in the same names, so differences between strategies did not soften the blow when the selling came. Gotoh also raised a second concern.

"Circular financing" refers to AI labs, chipmakers and cloud companies piling up investments in one another and commitments to buy computing capacity from one another, with those commitments then propping up each other's revenue and valuations. If investors come to suspect that part of that revenue is just their own money flowing back to them, valuations across AI stocks could be shaken. The broad losses on October 22 could be read as a sign that this suspicion is starting to show up in prices.

Next test: earnings next week

Whether the selloff continues will be tested by next week's events. Alphabet and Microsoft report earnings on October 28 and Amazon on October 29, and the FOMC meets the same week (October 27–28). The focus will be on whether free cash flow is shrinking and borrowing is rising as AI capital spending balloons. If the hyperscalers' numbers fail to show a return on that investment, funds may keep cutting their tech exposure, and the damage to hedge fund returns could carry over past October.

Either way, these figures come from media reports. Neither Goldman's source data nor the size of each strategy's losses has been verified. What is clear is that the AI stock decline is no longer just a story about how a handful of stocks are trading. It is now being counted as losses at the funds that rode those stocks up.