Hedge funds faced another bout of volatility on Friday as a broad sell-off in artificial intelligence-linked stocks spread across global equity markets, prompting investors to unwind some of the year’s most crowded technology trades, according to a report by the Financial Times.
Asian markets led the declines, with Japan’s Nikkei 225 falling more than 5% as heavily owned semiconductor and AI-related stocks came under intense selling pressure. Losses also extended across Greater China, with the CSI 300 and Hang Seng indices retreating as investors reduced exposure to high-growth technology companies.
The retreat follows mounting concerns that elevated valuations in AI beneficiaries have become increasingly vulnerable to shifts in sentiment amid rising geopolitical risks and a less supportive interest-rate outlook.
Technology shares bore the brunt of the selling. Japanese memory chip producer Kioxia suffered one of the largest declines, while Taiwan Semiconductor Manufacturing Co. (TSMC) also fell sharply. In China, AI developers came under pressure after fresh competition emerged in the country’s rapidly evolving large language model market.
The weakness followed a sell-off on Wall Street, where memory, storage and semiconductor companies posted steep declines as investors rotated away from some of the strongest-performing AI trades.
For hedge funds, the move represents another test of risk management after many managers spent much of the past year building significant positions in companies expected to benefit from the AI investment boom.
Market participants said several funds were forced to reduce positions as volatility accelerated, with crowded trades unwinding rapidly across technology sectors. While many hedge funds entered the latest correction with portfolio hedges in place, brokers indicated that losses continued to mount as selling intensified.
The reversal comes against a backdrop of renewed geopolitical uncertainty, including escalating tensions in the Middle East that have pushed oil prices higher, alongside growing expectations that central banks may keep interest rates elevated for longer than previously anticipated.
Higher energy prices and persistent inflation concerns have prompted investors to reassess valuations across growth sectors, particularly companies whose share prices have been driven by expectations of long-term AI-related earnings growth.
Despite the sharp correction, many AI-linked stocks remain among the best-performing equities over the past 12 months, suggesting that some investors view the latest pullback as profit-taking rather than a fundamental reassessment of the sector.
Nevertheless, the speed of the decline highlights the concentration risk that has developed around AI investments and underscores the challenges facing hedge fund managers navigating increasingly volatile and crowded technology trades.
