Morgan Stanley Report Reveals Cracks in Supply-Demand (Order Flow)
Amid the sharp drop (plunge) in AI-related stocks, investors should focus first not on whether the technology narrative has broken down, but on Wall Street hedge funds’ remaining selling capacity. According to a Wall Street Journal (WSJ) report cited by Maeil Business Newspaper Securities, a Morgan Stanley client report showed that stock-picking hedge funds actively cut positions last month at the fastest pace in more than a decade. The fact that major funds hit by losses after the Democrats’ landslide victory in the U.S. midterm elections are reducing both investment positions and staff suggests that the decline in AI stocks has moved beyond a price correction into a broader restructuring of supply-demand (order flow).
Equity-market exposure indicates how sensitive a fund is to stock-price movements. Morgan Stanley data showed that stock-picking hedge funds have reduced their exposure by about 9% since June. This is more than a simple rotation between stocks. When funds are reducing risk exposure itself, individual companies can become selling targets even if their investment cases remain intact.
How Weak Returns Are Driving Sales of AI-Related Stocks
More than 40% of stock-picking hedge funds had posted flat or negative year-to-date returns as of late October. When funds seeking to limit losses sell similar stocks at the same time, falling share prices can trigger further exposure reductions. Market concerns are centered on this potential chain reaction.
According to a Goldman Sachs client report, hedge funds concentrated in technology, media and telecommunications (TMT) lost more than 4% in a single day. Their year-to-date gains had reached as much as 24% before the sharp drop (plunge), but were effectively wiped out. When gains accumulated during a rally evaporate quickly, asset managers have a stronger incentive to reduce position sizes rather than wait for a technical rebound.
An easily overlooked point is that the data provide no basis for treating all AI-related stocks as sharing the same earnings trajectory. It was not disclosed which specific stocks fell, by how much, or which positions were unwound. The material therefore cannot support conclusions about changes in the revenue or profits of individual companies; the directly observable signals are limited to hedge-fund risk reduction and TMT investment losses.
Samlyn Capital’s Shift Highlights the Movement of Funds
Samlyn Capital has decided to unwind most of its equity positions outside the financial industry sector and concentrate its investments in financial stocks. It is also reducing senior investment-research staff covering nonfinancial areas, including industrials, technology and retail. Because the portfolio adjustment has extended to staffing changes, the response appears closer to a narrowing of the firm’s investment mandate than to temporary trading.
- AI and TMT: This area faces supply-demand (order flow) pressure from the combination of losses at concentrated hedge funds and reduced exposure. Continued selling by multiple funds could intensify downward pressure regardless of individual companies’ fundamentals.
- Financial stocks: This is the area Samlyn Capital has chosen to focus on after unwinding most of its nonfinancial positions. However, one hedge fund’s decision does not provide sufficient grounds to generalize that financial stocks overall will see inflows or improved returns.
- Stock-picking hedge funds: Both weak performance and reduced risk exposure have been confirmed. In this environment, the pace of position reductions, rather than rebounds in portfolio holdings, is driving market volatility.
Signals Korean Investors Should Watch Next
Separating what has been confirmed from what remains unknown provides a clearer basis for investment decisions. Confirmed developments include exposure reductions by major hedge funds, losses at TMT-focused funds and Samlyn Capital’s unwinding of nonfinancial positions. The data do not disclose each fund’s specific losses, the scale of staff reductions, the stocks or volumes sold, or the actual percentage declines in AI-related stocks.
- Whether position reductions continue: If stock-picking hedge funds keep lowering their exposure, supply-demand (order flow) pressure on AI-related stocks will persist. If the reductions stop or reverse, forced selling pressure could ease.
- Whether TMT losses spread: Investors should watch whether the one-day losses prompt other funds to reduce risk. If losses deepen, concerns will grow that asset managers holding similar positions may sell simultaneously.
- Scope of Samlyn Capital’s restructuring: The extent of reductions among research staff covering nonfinancial sectors will indicate how far the firm’s investment-strategy shift is going.
- Separating individual stocks from market supply-demand (order flow): In the absence of company-specific earnings data, price movements in AI stocks should not immediately be interpreted as changes in business competitiveness. While funds continue reducing risk, investors need to assess corporate fundamentals and trading supply-demand (order flow) separately.
The trigger for the opposing scenario would be an end to hedge funds’ exposure reductions. If risk exposure recovers, indiscriminate selling will have less influence on the pricing of AI-related stocks. Until then, the market has already priced in hedge-fund losses, while whether the position unwinding has ended remains unconfirmed.
This article was automatically summarized and analyzed based on the original news report. View the original article (Maeil Business Newspaper Securities)
