Wall Street Hedge Funds Buckle as the Biggest Deleveraging Wave in Over a Decade Hits

One of the most brutal selloffs in US stock market history is pushing the hedge fund industry into a rare systemic stress test.

According to a Morgan Stanley client report, October was the month with the largest active de-grossing by equity hedge funds in more than a decade, and their market exposure has shrunk by about 9% since June. The Nasdaq 100 index plunged 6.4% in a single day on Thursday, evaporating about $2.3 trillion in market value, while the VIX "fear index" spiked 70%, further deepening an industry slump that had already persisted for several months. Meanwhile, Samlyn Capital, Engineers Gate, Walleye Capital and several other hedge funds have recently announced layoffs or restructurings in succession.

The damage the market turmoil has inflicted on the industry goes beyond any single event. In a Thursday client note, Goldman Sachs pointed out that hedge funds focused on the telecom, media and technology sectors lost more than 4% on Thursday alone, all but erasing the gains of as much as 24% built up this year before the summer's AI rally reversed; multi-strategy funds lost 1.4% that day as well, with tech stocks and momentum trades the main drags.

October's Deleveraging Wave: The Largest Position Unwinding in More Than a Decade

October was the flashpoint for this round of pressure. The Morgan Stanley report shows that active de-grossing by equity long/short hedge funds that month was the largest in more than a decade, and more than 40% of such funds had flat or negative returns for the year through October, even as the S&P 500 and the Nasdaq Composite remained in positive territory year to date over the same period.

Industry insiders said firms have spent recent weeks continuously cutting team size and closing positions to control risk, and these actions have in turn further pressured the popular positions that funds generally hold, creating a negative feedback loop. Several mainstream investment styles within multi-strategy funds, including fixed income trading and macro trading, have performed poorly in recent months.

A bank executive who does business with hedge funds said Thursday's losses could have been even more severe had a large number of funds not already actively reduced leverage in the preceding weeks.

Star Funds' Performance Reverses, With Some Firms Facing Margin Calls

At the individual firm level, Lone Pine Capital's hedge fund gained more than 40% in the first half of this year, but then suffered its worst three-month performance since inception in the third quarter. According to people familiar with the matter, the fund lost 8.8% before tax in October, and its net pre-tax return for the year through October has turned negative at 7.5%. The firm managed about $19 billion in assets as of September. In its third-quarter letter to investors, Lone Pine said performance was hurt by the rapid reversal in AI stocks and by reverse losses on its strategy of shorting companies considered vulnerable to AI disruption.

According to The Wall Street Journal, Arini Capital Management, once a high-flyer, has sharply cut its bond holdings in recent weeks, partly because counterparty banks issued margin calls.

Walleye Capital cut several equity portfolio managers this week after suffering its worst single-month performance since March 2020. The multi-strategy fund, which once managed more than $17 billion in assets, said in a letter to investors obtained by The Wall Street Journal that it will return capital to some clients after assessing its optimal size.

Organizational Overhaul: Layoffs and Strategic Retrenchment in Parallel

This round of market volatility is prompting some firms to launch deeper strategic restructurings. According to people familiar with the matter, Samlyn Capital, which manages about $7 billion, is narrowing its investment focus to financial services stocks, with heads of other sectors and related investment team members leaving as a result. Some people familiar with the matter said Samlyn's flagship fund was down about 5% for the year through October.

Engineers Gate, a roughly $4 billion fund founded by Glenn Dubin, recently decided to shut down the vast majority of its "quantamental" strategy — which blends human judgment with quantitative methods — and cut all but five of the portfolio managers under that strategy; business head Mike Daylamani will also leave. Bloomberg had previously reported the layoffs at Engineers Gate. People familiar with the matter said the fund's decline for the year through October was in the mid-single digits, and the firm said it will continue to focus on its core quantitative investment strategy.

Billionaire Dan Loeb, founder of Third Point, joked about the historic market rout on social media X on Thursday with the line "hold your hedge fund manager tight." Behind the quip is the deep pressure the entire industry faces after the summer's AI rally reversal, October's concentrated position unwinding, and this week's politically driven market turbulence.

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