AI sell-off hits tech hedge funds hardest since 2008

Technology-focused hedge funds posted their largest monthly loss since January 2008 after a sharp reversal in AI-related equities. The HFRI Technology Index fell 7.0% in July and the HFRI Fund Weighted Composite Index declined 1.1%, trimming its year-to-date gain to 6.2% after a strong second quarter when the composite rose 6.4%.

Equity hedge and event-driven strategies were among the biggest contributors to the decline as AI-focused stocks weakened. The HFRI Equity Hedge Index fell 1.85% for the month. Within that group, the HFRI EH: Technology Index plunged 7.0% and the HFRI EH: Fundamental Growth Index dropped 4.2%. By contrast, value-oriented equity managers fared better, with the HFRI EH: Fundamental Value Index estimating a 0.5% gain in July.

Event-driven strategies fell 1.77% overall. Special situations strategies lost 3.9% and the event-driven multi-strategy benchmark declined 3.0%. Activist strategies provided some offset, returning about 1.0% for the month.

Performance among other strategy groups was mixed. The HFRI Relative Value Index rose 0.2%, supported by a 2.1% return from yield-alternative approaches and a 0.7% gain for fixed-income multi-strategy managers. Sovereign fixed-income relative-value strategies fell 1.6% as bond yields increased while the Federal Reserve left interest rates unchanged. Macro strategies declined 0.3%. Commodity-focused managers posted a 2.2% gain, while systematic diversified/CTA and discretionary thematic strategies each fell roughly 0.9%. The HFR Cryptocurrency Index was estimated to have gained 2.4%, and multi-manager “pod shop” funds lost 0.4%.

HFR reported a sharp rise in performance dispersion. The top 10% of funds in the HFRI Fund Weighted Composite Index returned an average 7.6% in July, while the bottom 10% lost an average 12.5%, a 20.1 percentage-point gap compared with 16.7 points in June. Over the 12 months through July, the top decile gained 70.9% and the bottom decile lost 8.2%, a 79.1 percentage-point spread. About 45% of hedge funds produced positive returns in July.

Kenneth J. Heinz, president of HFR, called July “an extremely intense and volatile trading environment.” He pointed to negative momentum in technology names and listed uncertainty around AI valuations and expectations, geopolitical tensions, supply-chain pressures, shifting interest-rate outlooks and political developments as factors affecting managers.

HFR noted that funds with concentrated positions in AI-related names experienced larger losses, while more diversified and value-oriented approaches recorded smaller declines.