Crowded AI Bets Reverse Asia Hedge Fund H1 Gains
A sharp July unwinding of leveraged semiconductor positions has erased months of outperformance for regional funds, raising questions about the sustainability of the AI trade.
Asia-based hedge funds have surrendered massive first-half gains this month as a sudden unwinding of crowded artificial intelligence trades triggered sharp losses across the region. The reversal wiped out a significant portion of the double- and triple-digit returns generated by bullish wagers on the semiconductor supply chain. Funds are now grappling with whether the correction is a temporary setback or a structural shift.
The scale of the drawdowns has been severe for the most exposed players. WT China Fund, managed by Wang Tongshu, dropped 17% through July 17 after surging 120% in the first six months. Keystone Investors Pte’s hedge fund retreated 12% over the same period, having jumped 63% in the first half. FengHe Asia, CloudAlpha Capital Management and Indus Capital Partners also posted declines.
The selloff targeted the supply chain's most popular names. SK Hynix and Kioxia Holdings both tumbled roughly 28% this month, with Kioxia now trading 40% below its peak. Chinese AI-linked stocks like Z.AI lost more than half their value earlier in the month before recently rebounding. Bullish wagers on global semiconductors were the most crowded trade in a recent Bank of America global fund manager survey.
The magnitude of the losses points to forced selling rather than a fundamental repricing. Global banks have recently raised financing rates for hedge funds seeking to add leveraged bets on stocks like SK Hynix and Samsung Electronics through swaps, effectively rationing capacity. This constraint, combined with rebalancing in leveraged single-stock exchange-traded funds and retail unwinds, amplified the downside.
Positioning dynamics likely drove the volatility more than corporate fundamentals. "Investors who had a strong first half may have faced redemption or rebalancing pressure into quarter-end," said John Pinkel, a partner at Indus Capital, whose long-only Select Fund accounts for 71% of the firm’s $6.4 billion assets. "Managers without sufficient cash on hand to absorb that can become forced sellers, amplifying any pullback."
Still, underlying anxieties about the AI trade are growing ahead of earnings season from hyperscalers like Microsoft, Meta Platforms and Amazon. DWS downgraded the global semiconductor industry from positive to neutral, arguing that lofty expectations for cloud spending and high barriers to entry are already priced in. "The AI story in the semiconductor sector remains intact," DWS portfolio manager Tobias Rommel wrote. "But after the strong rally, it is less about growth and more about the sustainability of earnings."
Not all strategies suffered. Eagle’s View Capital Management posted a rare gain in its Japanese convertible bond arbitrage fund by exploiting the volatility. Meanwhile, Asia-based macro hedge funds largely missed the AI surge entirely. Their traditional focus on fixed income and currencies left them sidelined during the equity rally, while geopolitical events like the US and Israeli war against Iran upended their interest rate bets.
