AI selloff deals a heavy blow to hedge funds, with massive losses triggering layoffs and strategy contraction.

An October market selloff has forced hedge funds to unwind positions at the fastest pace in years, with Morgan Stanley data showing the largest active de-grossing among stock-picking funds in over a decade and market exposure down roughly 9% since June; by end-October more than 40% of funds were flat or negative year-to-date. Goldman Sachs reported TMT-focused hedge funds fell over 4% on Thursday and multi-strategy funds lost 1.4%, while Lone Pine Capital dropped 8.8% in October alone. Firms are cutting staff and narrowing strategies: Samlyn Capital, which manages about $7 billion, is refocusing on financial services stocks and shedding sector heads and investment staff, Engineers Gate has slashed its quant-and-discretionary team, Walleye Capital has cut portfolio managers, and Arini Capital has sharply reduced bond holdings. The retrenchment matters because it signals broad risk reduction across AI, healthcare and high-yield credit exposures, potentially amplifying selling pressure and reducing market liquidity. Investors should watch further de-grossing data, fund redemption flows and whether tech and AI-linked holdings stabilize as managers report October performance.