A rapid sell-off in AI stocks is triggering a chain reaction across Wall Street, with several major banks issuing margin calls to hedge funds holding concentrated positions. Some trading strategies suffered their worst single-day losses since the COVID-19 pandemic, sharply increasing market deleveraging pressure.
According to reports, Goldman Sachs and JPMorgan Chase have recently demanded additional collateral from several of their hedge fund clients, prompted by significant losses in AI and semiconductor-related holdings.
Data from Goldman Sachs shows that as of noon Tuesday in New York, fundamental long/short strategies fell 1.3%, multi-strategy funds declined 1.7%, and systematic long/short strategies dropped 1.0%. The last time all three strategies fell more than 1% on the same day was during the most volatile period of the COVID-19 crisis in March 2020.
The Nasdaq 100 Index briefly entered a technical correction on Tuesday, falling 10% from its all-time high in early June. Goldman Sachs tracking data indicates that on July 27, the bank's overall book experienced its largest deleveraging event since September 2025, with a deviation of negative three standard deviations, driven primarily by single stocks on the technology and AI momentum list.
Margin calls intensify
According to four sources, Wall Street banks have recently issued margin calls to hedge funds with portfolios heavily concentrated in specific sectors, requiring them to post additional collateral while maintaining existing leverage levels. Both Goldman Sachs and JPMorgan Chase declined to comment.
One source close to one of the banks stated, "This is the risk management the market should have right now. It's fairly basic operations." The source added that many margin calls were automatically triggered by market volatility, with such clauses typically written into agreements between funds and banks.
When providing financing to hedge funds, banks usually embed protective mechanisms to prevent losses during market reversals. Prime brokers provide leverage to funds by accepting stock portfolios as collateral, helping to amplify returns. However, when market movements go against the portfolio's positions, leverage equally amplifies losses.
Leverage buildup sets the stage
In a recent client note, Goldman Sachs pointed out that the cumulative increase in total hedge fund leverage during the first five months of this year was the largest expansion since the bank began tracking such data in 2016, indicating that funds had borrowed heavily to bet on related trades before the sell-off.
The core driver of this downturn was a directional error in momentum strategies. According to Goldman Sachs data, the AI momentum factor has recorded a 41% drawdown in July, potentially becoming the largest single-month decline on record, excluding the COVID-19 period. Memory chip-related stocks experienced massive selling, with net selling over the past two days reaching an all-time high since the trade became popular.
Looking at individual stocks, Sandisk and Intel have fallen 53% and 39% from their respective highs, while the Philadelphia Semiconductor Index has lost a quarter of its market value since the end of June.
Concentration risk exceeds dot-com bubble levels
The underlying cause of this turmoil is the continued increase in market concentration. According to Capital Group data, the top 10 components of the S&P 500 Index now account for about 40% of the index's total weight, exceeding levels seen during the dot-com bubble in the early 2000s.
Banks themselves have not been immune. In its mid-year report, Goldman Sachs disclosed that as of June 30, approximately 16% of the risk exposure in its prime brokerage book was directly tied to AI memory stocks.
Despite severe daily losses, hedge funds remain in positive territory for the year overall—Goldman Sachs data shows that average annual returns across various strategies are still above 10%. However, as deleveraging pressure continues to unfold, whether the market can stabilize from here remains to be seen.
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