Hedge Fund Risk Retreat Largest in a Decade, Morgan Stanley Says

Global equity hedge funds cut risk at the steepest rate in more than a decade through the first week of November as a widespread unwind gathered steam, Morgan Stanley prime brokers wrote in a note dated Tuesday.

The gross market value of long-short stock funds declined 10.7% since late June, they wrote. The figure shows the scale of the pullback among global investors, who have been hit hard by a rout in artificial intelligence stocks that gathered steam following the recent US mid-term elections.

Hong Kong and China represented the only market that finished the week net bought, as so-called national team support from state-led funds drove investors to cover short positions in yuan-denominated stocks listed on domestic exchanges, Morgan Stanley added.

Hedge fund returns in the first week of November were negative across all regions. The average Asia-based fund lost 1.5%, the largest regional drop, although that still beat the more than 5% decline of the MSCI Asia-Pacific Index over the same period. The losses eroded the return of the Asia funds this year to around 2.6%, far behind the 6% gains among their US-based peers.

China stock-picking stood out as the lone strategy with positive average returns during the first week of November, gaining 1.1%, extending the average advance this year to 6.7%. Hedge funds covered short positions in Chinese consumption stocks and locally-listed semiconductor and state-owned companies.

Across Asia, the risk retreat among hedge funds concentrated on information technology, where funds cut bullish bets and added new bearish wagers — particularly in Taiwan and South Korea. Fundamental stock pickers dominated the selling, with multi-strategy, macro and quant funds covering shorts.

Gross leverage of Asia equity long-short funds fell 3 percentage points in a week to 124%, a touch above the 123% lows seen when President Donald Trump’s tariff announcements rattled markets in April 2025. Net leverage among US long-short funds fell 5 percentage points in a single session, tumbling to 42%.