Tech Selloff Gives Hedge Funds Worst Day Since COVID
Hedge funds suffered their worst day since the COVID rout as big tech sold off on AI spending doubts. Meta fell 7 percent and the Nasdaq lost 2.6 percent.
Hedge funds suffered their worst day since the COVID-era market rout as big tech sold off on doubts over massive AI buildout spending. Meta fell 7 percent and the Nasdaq lost 2.6 percent.
What triggered the selloff
The renewed selloff in big tech stocks was driven by growing skepticism over the massive spending on AI infrastructure. One catalyst was Meta, after the company said it would issue a new class of shares to help it raise funds for its AI plans. Meta Platforms slumped 7 percent on October 22, its largest drop since July. Nvidia tumbled 4 percent, while the broader Nasdaq Composite lost 2.6 percent, its largest decline since June 5. The Philadelphia semiconductor index dropped 5.6 percent, and Amazon lost more than 3 percent. Asian stocks, from South Korea to China, were also caught in the selloff, pressured by higher oil prices and fears over hefty AI spending.
How bad the damage was
Goldman Sachs' prime brokerage team told clients: "If last Thursday felt bad, today has been worse." All three major strategies it tracks - fundamental equity long-short, systematic and multi-strategy funds - lost more than 1 percent on October 22. That was a first since the COVID pandemic. Global fundamental long-short funds, or stock pickers, have dropped 3.8 percent so far in October, though they are still up 8.8 percent for the year. Tech-focused and Asia-focused hedge funds were the biggest losers this month through October 22, down roughly 10 percent and 9 percent respectively, according to Goldman. The downturn triggered deleveraging among hedge funds, as losses in crowded AI-linked trades forced investors to cut exposure and rein in risk.
Why AI spending is spooking markets
Meta's results show why investors are worried. Its revenue beat expectations at 64.60 billion dollars, up 26 percent, but its free cash flow turned negative at minus 2.12 billion dollars - the first time in more than a decade that Meta has burned cash. Capital spending reached 34.91 billion dollars in the quarter, and Meta raised the floor of its 2026 capex forecast to a range of 135 to 145 billion dollars. To fund its AI push, Meta created a new class of non-voting Class C shares. The company says it could raise hundreds of billions of dollars over several years for AI investments, acquisitions and employee compensation, while keeping Mark Zuckerberg's voting power intact. The worry has spread to credit markets. The cost of insuring Meta's debt against default hit an all-time high, with its five-year credit default swaps trading at a record 114.79 basis points. Masaki Gotoh, a partner at Tokyo-based TriVista Capital, said his fund had trimmed its hardware investments since late June. "I'm actually a very strong believer in AI... But the concentration level is staggering. If you go back to the IT dotcom bubble, that had similar types of concentrations and we saw that happen. The circular financing is also a source of some concern," he said.
Sources
- Reuters - https://www.reuters.com/markets/wealth/hedge-fund-returns-worsen-this-week-tech-selloff-deepens-2026-10-23/ - SourceFirst News - https://sourcefirstnews.com/meta-q3-2026-earnings-shares-fall-ai-spending-class-c-stock