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 largest month for active deleveraging by equity hedge funds in more than a decade, with their market exposure shrinking by roughly 9% since June. The Nasdaq 100 index plunged 6.4% in a single day on Thursday, wiping out approximately $2.3 trillion in market value, while the VIX "fear index" surged 70%, further intensifying an industry malaise that had already been building for months. Meanwhile, several hedge funds including Samlyn Capital, Engineers Gate, and Walleye Capital have recently announced layoffs or restructurings.
The damage to the industry from market turbulence has exceeded the scope of a single event. Goldman Sachs noted in a client report on Thursday that hedge funds focused on telecommunications, media, and technology sectors lost more than 4% in a single day on Thursday, nearly erasing the 24% year-to-date gains accumulated before the AI rally reversed this summer; multi-strategy funds also lost 1.4% that day, with tech stocks and momentum trades as the main drags.
October Deleveraging Wave: Largest Position Unwinding in Over a Decade
The concentrated outbreak of this round of pressure occurred in October. Morgan Stanley's report showed that active deleveraging by equity long-short hedge funds that month reached the highest level in more than a decade, with over 40% of such funds posting flat or negative returns through October this year, while the S&P 500 index and Nasdaq Composite index still maintained positive year-to-date returns over the same period.
Fund industry insiders said institutions have been continuously reducing team sizes and unwinding positions in recent weeks to control risk, and these actions themselves further pressured the popular positions widely held by various funds, creating a negative feedback loop. Multiple mainstream investment styles among multi-strategy funds, including fixed income trading and macro trading, have performed poorly in recent months.
A bank executive with business dealings with hedge funds said that without the significant deleveraging that many funds had already undertaken in previous weeks, Thursday's losses could have been even more severe.
Star Fund Performance Reversal, Some Institutions Face Margin Calls
At the institutional level, Lone Pine Capital recorded gains of over 40% in its hedge fund 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% on a pre-tax basis in October, with pre-tax net returns through October turning negative at 7.5%. The firm managed approximately $19 billion in assets as of September. Lone Pine stated in its third-quarter letter to investors that performance was dragged down by the rapid reversal in AI stocks and reverse losses from its strategy of shorting companies considered vulnerable to AI disruption.
According to reports, Arini Capital Management, once a high-flying firm, has significantly reduced its bond holdings in recent weeks, partly due to margin calls from counterparty banks.
Walleye Capital cut several equity portfolio managers this week after suffering its worst monthly performance since March 2020. According to a letter to investors obtained by media outlets, this multi-strategy fund, which once managed over $17 billion in assets, said it would return capital to some clients after evaluating its optimal size.
Institutional Restructuring: Layoffs and Strategic Contraction in Parallel
This round of market volatility is prompting some institutions to initiate deeper strategic restructuring. According to people familiar with the matter, Samlyn Capital, which manages approximately $7 billion, is narrowing its investment focus to financial services stocks, with heads of other sectors and related investment team members departing as a result. Some sources said Samlyn's flagship fund lost about 5% through October this year.
Engineers Gate, a roughly $4 billion fund founded by Glenn Dubin, recently decided to shut down the vast majority of its "quantamental" strategy—which combines human judgment with quantitative methods—and cut all but five portfolio managers under that strategy, with business head Mike Daylamani also set to depart. Bloomberg had previously reported on the layoffs at Engineers Gate. Sources said the fund was down in the mid-single-digit range through October this year, and the company said it would continue to focus on its core quantitative investment strategy.
Third Point founder and billionaire Dan Loeb quipped on social media platform X on Thursday with a single line—"hug your hedge fund manager tight"—mocking the historic market rout. Behind this joke lies the deep pressure facing the entire industry after experiencing the summer AI rally reversal, October's concentrated deleveraging, and this week's politically driven market turbulence.
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