U.S. stocks lost nearly $3 trillion overnight, but something else is more worth watching: some funds were forced to liquidate
Walleye Capital, with $17 billion under management, lost 5.9% in October, its worst month since March 2020
On the 5th, it announced it was shutting down its equity long-short team and returning some capital
On the same day, Engineers Gate laid off most of its Synthesis equity team after losing 5.5% in October
This isn’t just two firms having bad luck. It’s the same structure coming due
Hedge funds split the market into baskets of long and short positions, relying on correlations to offset risk, then add leverage
Usually, it’s a stable strategy. But when correlations shift the wrong way, positions that were supposed to hedge each other lose together, and leverage magnifies the losses
With weaker risk controls, the whole thing blows up
Put simply: they didn’t get the direction wrong—they couldn’t withstand the volatility
Goldman Sachs data shows that from October 8 to 14, hedge funds sold global AI stocks for five straight days, wiping out their year-to-date positions in a week
Morgan Stanley: October saw the most active unwinding of positions in more than a decade. By month-end, AI exposure had fallen to underweight for the first time since early 2023
That underweight position is the key
It shows this wasn’t a sentiment-driven sell-off; positioning was reset
The upside: selling pressure may be nearing its end. The downside: there may be no one to drive a rebound
Margin calls have also reached Asia
Leveraged clients in Hong Kong and Taiwan were asked to post more collateral. Some were forced to take shares at a loss because of structured notes
Nomura estimates that leveraged ETFs still had to sell $47 billion before the close. The 3x semiconductor bull ETF fell 38.7% in a single day
My take
What’s falling this time isn’t AI demand—it’s crowded leverage
Demand hasn’t weakened. On the day of the plunge, Google was still announcing a $17 billion data center investment
The problem is that everyone is holding the same story in the same way
So don’t buy the names that fell the hardest. They fell hardest because they were carrying the most leverage
Wait for three signals: the VIX falling below 20, hedge funds rebuilding their exposure, and mechanical selling by CTAs and leveraged ETFs coming to an end
Nearly $3 trillion vanished overnight, but what blew up was the net asset value of a batch of funds
The more costly bill may belong to those who haven’t yet received a margin call
#U.S.StocksLoseMoreThan$2TrillionOvernight,SeveralHedgeFundsFaceLiquidation
Walleye Capital, with $17 billion under management, lost 5.9% in October, its worst month since March 2020
On the 5th, it announced it was shutting down its equity long-short team and returning some capital
On the same day, Engineers Gate laid off most of its Synthesis equity team after losing 5.5% in October
This isn’t just two firms having bad luck. It’s the same structure coming due
Hedge funds split the market into baskets of long and short positions, relying on correlations to offset risk, then add leverage
Usually, it’s a stable strategy. But when correlations shift the wrong way, positions that were supposed to hedge each other lose together, and leverage magnifies the losses
With weaker risk controls, the whole thing blows up
Put simply: they didn’t get the direction wrong—they couldn’t withstand the volatility
Goldman Sachs data shows that from October 8 to 14, hedge funds sold global AI stocks for five straight days, wiping out their year-to-date positions in a week
Morgan Stanley: October saw the most active unwinding of positions in more than a decade. By month-end, AI exposure had fallen to underweight for the first time since early 2023
That underweight position is the key
It shows this wasn’t a sentiment-driven sell-off; positioning was reset
The upside: selling pressure may be nearing its end. The downside: there may be no one to drive a rebound
Margin calls have also reached Asia
Leveraged clients in Hong Kong and Taiwan were asked to post more collateral. Some were forced to take shares at a loss because of structured notes
Nomura estimates that leveraged ETFs still had to sell $47 billion before the close. The 3x semiconductor bull ETF fell 38.7% in a single day
My take
What’s falling this time isn’t AI demand—it’s crowded leverage
Demand hasn’t weakened. On the day of the plunge, Google was still announcing a $17 billion data center investment
The problem is that everyone is holding the same story in the same way
So don’t buy the names that fell the hardest. They fell hardest because they were carrying the most leverage
Wait for three signals: the VIX falling below 20, hedge funds rebuilding their exposure, and mechanical selling by CTAs and leveraged ETFs coming to an end
Nearly $3 trillion vanished overnight, but what blew up was the net asset value of a batch of funds
The more costly bill may belong to those who haven’t yet received a margin call
#U.S.StocksLoseMoreThan$2TrillionOvernight,SeveralHedgeFundsFaceLiquidation
