(Bloomberg) — Asia-based hedge funds have been caught up in the July selloff after the fervor for artificial intelligence and technology hardware propelled double- or even triple-digit returns in the first half.
WT China Fund, led by Wang Tongshu, lost 17% this month before fees through July 17, having soared 120% in the first six months, said people with knowledge of the matter, who asked not to be identified discussing private information. Keystone Investors Pte’s hedge fund retreated 12% through the same day, after surging 63% in the previous six months, said people with knowledge of its performance.
FengHe Asia, known for its stock-picking savvy and consistent performance, joined peers posting declines, as did funds of CloudAlpha Capital Management and Indus Capital Partners. Eagle’s View Capital Management saw its Japanese convertible bond arbitrage fund chalk up a rare gain so far this month, thriving on the volatility that July has brought, according to its manager Chris McGuire.
Asia hedge fund performance has come under pressure from a combination of renewed swings in crowded AI-related stocks, reversal of momentum trades and geopolitical uncertainty, Morgan Stanley prime brokers wrote in a note dated July 21. Selling pressure has eased this week, and fund performances have started to rebound. Yet industry observers expect losses in the first weeks of July to be far more widespread, given that many regional hedge funds don’t provide intra-month updates.
Among their most popular trades, memory chip giant SK Hynix Inc.’s South Korea-listed shares have lost about 28% of their value this month. Japanese peer Kioxia Holdings Corp. has tumbled 28%, and is now trading about 40% off its peak.
Hedge funds had piled into such bets in anticipation that AI’s advancement from training to actual applications would spur higher demand for chips, energy storage, cooling solutions and server components for years to come. They also sought out Chinese stocks such as MiniMax Group Inc. and Z.AI Co. on the country’s spending to rival the US and build cheaper AI models.
Z.AI, whose shares lost more than half of their value earlier in the month, have begun to rebound, along with fund performances.
The plethora of stocks in the AI supply chain in the region was the key driver behind the outperformance of Asia-based hedge funds in the first half. Bullish wagers on global semiconductors were the most crowded trade, according to a Bank of America Corp. global fund manager survey released earlier in July.
In the past couple of months, global banks have raised financing rates for hedge funds seeking to add to leveraged bets on stocks such as SK Hynix and Samsung Electronics Co. through swaps. Lenders are carefully rationing their capacity to accommodate new trades on them.
Investors have become increasingly jittery about what large cloud service providers known as hyperscalers — such as Microsoft Corp., Meta Platforms Inc. and Amazon.com Inc. — would reveal about their capital expenditure plans during the upcoming earnings season. Exacerbating the stock swings were the rebalancing of leveraged single-stock exchange-traded funds and retail punters unwinding trades.
Money manager DWS has downgraded the global semiconductor industry from positive to neutral, arguing a large part of the positive expectations based on surging demand from hyperscalers and high entry barriers for new competition had been priced in. While many stocks don’t appear too expensive based on multiples of future earnings, DWS cast doubt on whether current margins and growth rates can continue.
“The AI story in the semiconductor sector remains intact,” Tobias Rommel, portfolio manager for global equities at DWS, wrote in a note this month. “But after the strong rally, it is less about growth and more about the sustainability of earnings.”
Some funds remain positive on technology stocks amid the correction. The July selloff likely reflected fund positioning more than stock fundamentals, said John Pinkel, a San Francisco-based partner and manager of Indus Capital’s long-only Select Fund, which accounts for 71% of the firm’s $6.4 billion assets.
“Investors who had a strong first half may have faced redemption or rebalancing pressure into quarter-end,” he said. “Managers without sufficient cash on hand to absorb that can become forced sellers, amplifying any pullback.”
Meanwhile, macro hedge funds managed out of Asia have been more subdued this year. The US and Israeli war against Iran upended earlier bets on interest rates and they largely missed out on the AI-driven stock rally because of their traditional focus on fixed-income and currency trades.
CloudAlpha, FengHe and Keystone declined to comment, while WT Asset Management didn’t respond to a request for comment.
More stories like this are available on bloomberg.com
