Hedge funds had a turbulent July, epitomized by the saga surrounding Situational Awareness, the AI-focused fund whose portfolio value plunged nearly 70% in the month and that was forced to sell most of its assets to Citadel.
Hedge fund industry research firm HFR says technology funds had their worst month since 2008, with the HFR tech index falling 7%. Analysts at JPMorgan, citing preliminary figures from research firm Pivotal Path, note that TMT Equity Sector hedge funds lost an "unprecedented" 10%, excluding the Situational Awareness loss.
Has the selloff sufficiently cleared the decks? By some estimates, there has been a deep deleveraging, and long AI trades appear to be recovering — the Philadelphia "SOX" semiconductor index is up 10% so far this month. But July was bruising, and funds and prime brokers may want to rethink risks around concentration, volatility, margin levels and liquidity. If funds do rebuild exposure, it may not be as frenzied or as levered as before.
On the subject of clearing the decks, the historic U.S-Japan FX market intervention in late July sparked speculators' biggest-ever liquidation of net short yen positions in CFTC futures contracts. Funds' net short position collapsed by a record 118,000 contracts — a result of gross shorts plunging 72,000 contracts (the second most on record) and gross longs rising a record 46,000 contracts.
The dollar quickly sank around eight "big figures" to 155 yen from 164, but has already retraced half of that move, crossing back above 159 yen on Monday. The worry for Tokyo and Washington is this shows the market has little to no faith in their strategy, which would be costly in terms of hard dollars but, more importantly, longer-term credibility. As ever, FX traders are testing policymakers' resolve — will the Bank of Japan raise rates next month and outline a more hawkish tightening path? Can it?
Inflation figures from Beijing over the weekend will have disappointed those hoping to see China move out of its multi-year deflationary funk. Prices pressures were expected to cool thanks to lower oil, but not this much — both factory gate and consumer price inflation slowed more than expected.
Among the more discomfiting numbers was annual core CPI, which softened to 0.9%, falling below 1% for the first time since January and an indication that domestic demand remains weak. FX market developments are also worth bearing in mind — although the yuan is significantly undervalued, judging by the huge trade surplus, it continues to strengthen very gradually and is strongest against the dollar since early 2023. On the margins, that could also put further downward pressure on core goods inflation.
SPY•
