At the end of June, Lone Pine Capital's hedge fund was up more than 40% for the year. By the end of October it was down 7.5%, before fees. Then came Thursday, Nov. 5. The Journal's Peter Rudegeair, Juliet Chung and Ben Dummett report that October's selloff made hedge funds sell down positions faster than they had in years. Some cut staff too. Many were already deep in the red before the week's whiplash.
The scale comes from a Morgan Stanley (MS) note to clients Wednesday. In October, stock-picking hedge funds unwound more positions than in any month in over a decade. Their exposure to the market is down about 9% since June. Through October, more than four in 10 of these funds had made nothing or lost money this year. The S&P 500 and the Nasdaq were still up for the year. Read that twice. Pros with research staffs, borrowed money and the freedom to bet against stocks did worse than the plain index.
Then Thursday. Goldman Sachs (GS) told clients that funds focused on telecom, media and technology lost more than 4% in the day. Before the summer's AI selloff, those funds had been up as much as 24% for the year. Thursday took the last of it. Multistrategy funds lost 1.4%. The week was a whipsaw. Stocks rallied Wednesday after the election, then fell hard Thursday as investors worried the results could slow the AI build-out. Money moved to Treasurys and defensive stocks. One bank executive told the paper Thursday would have been worse if funds hadn't already cut their borrowing in prior weeks.
Cutting teams
Samlyn Capital, with around $7 billion, is pulling back to one area, financial stocks. Other sector heads and investment staff are leaving, people familiar with the firm said. Its main fund lost about 5% in October. Engineers Gate, a roughly $4 billion firm, is shutting most of its “quantamental” strategy, which paired human judgment with computer models. It kept five of that strategy's portfolio managers. Lone Pine, which managed about $19 billion as of September, told investors the AI reversal hurt it twice. Its AI stocks fell, and the companies it had bet against as AI losers rose instead. Arini Capital, which we covered last week, cut its debt holdings hard, partly after margin calls from its banks.
Our read
Behavioral, and Investments/Risk · IN04. The pros paid for top talent, borrowed to amplify their bets, and still got caught. The index fund that charges almost nothing is ahead of more than 40% of them. That's a year's lesson in a single month. A plain, spread-out plan with low costs doesn't need to be right about AI winners and losers. It just needs to stay owned. None of the funds named is held in any of our model books. Morgan Stanley is held at weight in 16 books and Goldman Sachs in 19, with nothing added.
Your version of this story is the alternatives line in your 401(k), or the private fund your brokerage offered you. Pull up its fee page and its one-year return next to the plain index fund's this week. If you're paying 1% or 2% plus a share of the profits for something that's trailing the index, that's the Lone Pine trade in miniature. Then look at your own trades from October. If you sold your AI names near the lows because the news was bad, you did what the pros did. Write down the rule you'd follow next time, and bring it to your next review. Fixing that rule now is cheaper than learning it again in the next downpour.