Wall Street Banks Hit Hedge Funds With Margin Calls on AI Sell-Off

Wall Street prime brokers are tightening the screws. Goldman Sachs and JPMorgan Chase have started demanding additional collateral from hedge funds with concentrated exposure to AI and tech, as a two-week sell-off in the space piles up losses on leveraged books.

What the banks are doing

Wall Street’s leading prime brokers including Goldman Sachs and JPMorgan Chase are demanding additional collateral from hedge fund clients as the sharp sell-off in AI-related stocks drives losses across some of the industry’s most crowded trades, per a Financial Times report.

Banks have asked funds with concentrated exposure to sectors hit hardest by the recent downturn to post additional collateral in order to maintain existing borrowing levels. In other words, keep your leverage where it is, but back it up with more cash.

Market participants stressed that many of the margin calls were triggered automatically by contractual risk management provisions rather than discretionary action by prime brokers. As market volatility increases or portfolio values decline, banks routinely require clients to provide more collateral to support outstanding leverage.

The AI trade cracks

The Nasdaq 100 briefly entered correction territory this week, falling 10% from its early June peak, while several semiconductor stocks that had been among the year’s best performers have suffered steep declines.

Specific names have been hit hard. SanDisk and Intel declined 53% and 39%, respectively, from their year-to-date highs.

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Hedge fund pain is showing up

According to Goldman Sachs, long-short funds fell 1.3%, while multi-strategy funds, which manage a range of assets and strategies including stocks, bonds and commodities, posted losses of 1.7%.

This is the first time both strategies have fallen more than 1% in a single day since 2020, when market volatility was extreme amid the COVID-19 shock. Still, cumulative returns for this year remain above 10% on average.

Why it matters for the tape

Forced deleveraging tends to feed on itself. When funds have to post more collateral, they often trim positions to raise cash, and the most crowded names get sold first, which then triggers more calls.

That is the dynamic to watch here, because the crowded names are the same AI and semiconductor leaders that carried the index all year. Check for more coverage in other news.

Options market and stocks to watch

Watch for continued volatility in the names most exposed to hedge fund deleveraging and the prime brokers running the books.

• NVDA: the anchor of the AI trade and the most crowded long. Watch flow for signs of institutional trimming.
• INTC: already down sharply from its YTD high, watch for continuation or a squeeze on any positioning reset.
• SNDK: cited as one of the hardest-hit names, watch for volatility as concentrated holders adjust.
• GS and JPM: the prime brokers making the calls. Watch for any commentary on prime brokerage risk in coming updates.
• QQQ: the cleanest proxy for the AI-heavy Nasdaq 100 correction.

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