Tech selloff wipes out hedge fund gains, prompting risk cuts and layoffs

Global Tech Selloff Erodes Hedge Fund Gains, Prompting Layoffs and Risk Reduction

Impact of Tech Selloff on Hedge Funds and Industry Response

By Summer Zhen and Anirban Sen

Market Downturn and Immediate Effects

HONG KONG, Nov 6 (Reuters) - A brutal global equity selloff led by technology stocks has wiped out year-to-date gains at many hedge funds, while forcing some managers to cut risks and reduce investment teams.

The post-midterm relief rally proved short-lived. Thursday's market rout compounded losses across the industry, with tech-focused funds bearing the brunt.

Performance Metrics and Sector Impact

Equity long-short funds that primarily invest in tech fell more than 4% on the day, leaving returns for the year "roughly flat", Goldman Sachs estimates showed.

That compares with a peak gain of 24% in June before the AI-driven selloff.

Global fundamental long-short managers were down 1.3% on average, while multi-strategy managers dropped 1.4% on Thursday, according to the bank.

Walleye Capital and Industry Layoffs

Walleye Capital's Strategic Adjustments

At the center of the industry's latest pain is $17 billion hedge fund Walleye Capital.

The New York-based multi-strategy fund said in an investor letter on Thursday, seen by Reuters, that it would trim its internal equity long-short business and reduce a substantial portion of its equity investment team.

"Following our worst month since March 2020, in an already challenging 2026, we have taken a hard look at every aspect of our firm," the letter said. "We have evaluated the optimal size of the Fund and plan to return a portion of our capital."

Broader Industry Layoffs and Risk Reduction

Several large multi-manager hedge fund platforms have cut leverage and laid off loss-making teams in recent weeks, said market participants, who expect more layoffs if declines continue.

Market Sentiment and Future Risks

Continued Volatility and Hedge Fund Strategies

The post-US midterm market turmoil extended losses after a bruising October, when sentiment was dampened by elevated AI-related borrowing costs and worries over returns.

The Nasdaq 100 index, which contains many tech heavyweights, plunged 6.6% last month, its biggest monthly fall in 18 months. JPMorgan estimates global hedge funds lost 3% in October.

Chasing Rallies and Overlapping Strategies

Massive de-risking ahead of the US midterms left many hedge funds chasing Wednesday's relief rally, only to be caught wrong-footed a day later, John Flood, ​​partner and managing director in the global banking and markets division at Goldman Sachs, said in a note on Thursday.

"Hedge funds are selling back pockets of the market (hyperscalers)" that they had just bought, he said.

Research firm PivotalPath warned in a note this week that the firm observed a high and increasing degree of overlap among the 10 largest multi-strategy hedge funds, meaning their unwind could fall on many of the same securities.

Reporting and Editing Credits

(Reporting by Summer Zhen and Anirban Sen; Editing by DJ Yap)