Major Wall Street investment banks have begun requiring hedge funds to post additional collateral as AI-related stocks experience a steep decline, increasing risks for leveraged investments, according to reports on July 28.
Goldman Sachs and JPMorgan Chase have notified hedge funds with concentrated holdings in technology sectors that extra collateral is necessary to maintain leverage levels, reflecting growing financial risks.
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Investment banks act as prime brokers, lending money against hedge fund portfolios to maximize returns.
However, recent sharp drops in AI semiconductor stocks have reduced collateral values and heightened loss risks, prompting margin calls.
The Nasdaq 100 index dropped 10% from its early June peak, entering a technical correction.
Key stocks like SanDisk and Intel fell 53% and 39% from their highs, respectively.
Hedge Funds Face Increased Pressure
Hedge funds that increased leverage during the AI rally face intensified demands for additional collateral due to impaired asset values.
The Financial Times reported this shows Wall Street's increasing concern over the speed and scale of the AI sell-off over the past two weeks.
Goldman Sachs reported that as of noon New York time, long-short funds fell 1.3%, while multi-strategy funds posted losses of 1.7%, marking the first single-day drops over 1% since market volatility in 2020.
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Despite the losses, cumulative returns for these funds remain above 10% on average this year.
Capital Group highlighted that the top 10 companies in the S&P 500 make up about 40% of the index, a concentration higher than during the early 2000s dot-com bubble.
This concentration raises risk exposure for both hedge funds and their lending banks.
The Financial Times noted, "banks themselves are not free from the concentration risk of AI-related assets," citing Goldman Sachs's disclosure that 16% of its prime brokerage exposure was tied directly to AI memory-related stocks as of June 30.
Despite these concerns, investment banks view margin calls as standard risk management.
One official said, "This is a level of risk management that can be fully anticipated under current market conditions.
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It is a very basic procedure."
