The technology trade may be poised to become even more dependent on retail investors and more volatile after a rough July, according to an assessment of preliminary data on technology, media and telecommunications equity sector hedge funds from JPMorgan Chase & Co.
Data from Pivotal Path suggest that such hedge funds lost more than 10% in July, JPMorgan's strategists including Nikolaos Panigirtzoglou wrote in a note to clients on Wednesday.
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That drawdown excludes Situational Awareness, the hedge fund that last week was forced to sell the bulk of its public stock portfolio after a sharp rout in semiconductor and technology stocks. To Panigirtzoglou, this suggests that other technology-focused equity hedge funds likely suffered from forced liquidations of exposure to semiconductor and memory stocks as well.
Shares of high-flying semiconductor and memory stocks tumbled in July, reversing a record-breaking rally, as investors rotated out of the top AI performers amid concerns about heavy spending. The Philadelphia Semiconductor Index shed 21% in July, its worst month since 2008.
The stark July loss could force hedge funds to apply more stringent risk management frameworks and concentration limits, thus limiting their capacity to hold highly volatile technology stocks, according to JPMorgan.
In addition, prime brokers could reduce balance sheet space allocated to such strategies, Panigirtzoglou wrote.
“If this assessment proves correct and the capacity of hedge funds to hold tech exposures is structurally reduced, the tech trade would become over the longer-term even more dependent on retail investors and thus more susceptible to the swings emanating from leveraged ETFs, retail option buying and retail margin accounts,” Panigirtzoglou wrote.
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