JPMorgan strategists say hedge funds took an unprecedented 10% loss on tech stocks in July, shrinking their capacity to hold tech exposure. The bank warns the Nasdaq trade could grow more dependent on retail investors as a result, even as tech shares wobble after weak earnings from memory-chip makers Sandisk and Western Digital.
JPMorgan strategists led by Nikolaos Panigirtzoglou warn that battered hedge funds, forced out of tech stocks after a punishing July, may leave the tech trade increasingly dependent on retail investors. Preliminary data from hedge-fund analytics group Pivotal Path suggest technology, media and telecommunications equity sector hedge funds posted an unprecedented 10% loss in July.
Multistrategy funds fared little better, dropping 2.3% for their fourth-biggest loss in history. Those figures exclude Situational Awareness, the AI- and tech-focused hedge fund that reportedly sold most of its holdings to Citadel. According to the JPMorgan strategists: "several other TMT Equity Sector hedge funds suffered from forced liquidations of memory stock exposures".
Nasdaq wobbles after a bruising July
The Nasdaq is up close to 2% so far in August, following a brutal July driven by the chip and memory-stock selloff. Tech stocks were set for a wobble Thursday, though, as shares of memory makers Sandisk and Western Digital tumbled after earnings failed to impress investors.
Risk budgets shrink for battered hedge funds
July's steep losses raise questions about a risk-management framework that let concentrated chip and memory-stock positions build up, the strategists said. Because assets under management at these hedge-fund categories fell in July, their risk budgets are mechanically shrunk — a shift that may push funds toward a more cautious stance on tech. Prime brokerages that finance hedge funds may also limit how much they can invest in the sector, according to the strategists.
Retail traders left to drive the tech trade
If hedge funds' capacity to hold tech exposure stays structurally reduced, the strategists said, the tech trade would grow more dependent on retail investors over the longer term and more susceptible to swings from leveraged ETFs, retail options buying and retail margin accounts.
Source: MarketWatch
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