Hedge funds forced out of tech stocks may leave the market at the mercy of retail traders

By Barbara Kollmeyer

JPMorgan says battered hedge funds may be buying less tech after a July rout

Retail investors may now have more of an influence on stock markets, and that may mean more volatility ahead, say JPMorgan strategists.

Tech stocks are wobbling on Thursday, as shares of memory makers Sandisk and Western Digital tumble following earnings that failed to impress investors.

Some on Wall Street have been hoping that a brutal July for tech, driven by chip/memory stocks, would clear a path for a better month ahead. For August so far, the Nasdaq COMP is up close to 2%.

However, our call of the day from strategists at JPMorgan led by Nikolaos Panigirtzoglou, warns of a continued bumpy ride ahead for the sector that may now be counting on less support from one influential group of bruised investors.

Preliminary data from hedge-fund analytics group Pivotal Path suggest an "unprecedented" 10% loss in July for technology, media and telecommunications, or TMT, equity sector hedge funds, the JPMorgan strategists said. Multistrategy funds suffered a 2.3% drop, their fourth-biggest in history, the data showed.

TMT hedge funds registered a bruising July, observes JPMorgan.

Panigirtzoglou and his team said the TMT hedge-fund losses exclude Situational Awareness, the high-profile AI- and tech-focused hedge fund that reportedly sold most of its holdings to Citadel. "This makes the 10% loss look even more striking and suggests that like Situational Awareness, several other TMT Equity Sector hedge funds suffered from forced liquidations of memory stock exposures," they said.

And thanks to a brutal July, "the capacity of TMT Equity Sector and Multi Strat hedge funds to hold tech exposures would be structurally more limited going forward," they said.

Here's the upshot for markets: "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."

As the strategists explained, the severity of July losses for those hedge funds "raises questions" about a risk-management framework that allowed concentrated positions in chip/memory stocks to build up.

"Going forward, the [assets under management] decline of these two hedge fund categories for July means that their risk budgets are mechanically shrunk," they said. Those funds may adapt a more cautious and rigorous stance when it comes to tech, cutting out heavy concentrations. The prime brokerages that provide the financing to hedge funds may not allow them to invest as much in tech, the Panigirtzoglou team said.

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The markets

U.S. stocks SPX DJIA have opened flat, with tech COMP falling. The yield on the 10-year Treasury note BX:TMUBMUSD10Y is rising, along with gold (GC00). Oil prices (CL.1) (BRN00) have turned higher.

 
Key asset performance                                                Last       5d       1m     YTD     1y 
S&P 500                                                              7723.55    5.57%    3.22%  12.83%  21.73% 
Nasdaq Composite                                                     26,363.44  7.86%    1.90%  13.43%  24.54% 
10-year Treasury                                                     4.631      -4.60    7.30   45.90   37.20 
Gold                                                                 4337.2     4.19%    4.95%  0.12%   24.54% 
Oil                                                                  75.35      -10.25%  4.93%  31.25%  18.07% 
Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Sandisk's stock (SNDK) is down 10% after the memory-chip maker's guidance missed high Wall Street expectations. Western Digital stock (WDC) is also slumping despite an earnings beat.

AppLovin shares (APP) are slumping 14% after disappointing earnings from the ad-tech platform.

Up to 911.5 million shares held by SpaceX (SPCX) insiders will be up for sale on Thursday.

Less than six months after announcing 40% of its staff would be laid off in favor of AI, Block (XYZ) said that strategy is yielding results.

DraftKings (DKNG), Airbnb (ABNB) and Rigetti Computing (RGTI) will report quarterly results after the close.

Weekly jobless claims came in at 199,999, little changed from last week's total, while second-quarter productivity jumped 1.4%, versus expectations for a rise of 0.6%. Wholesale inventories are due at 10 a.m.

OpenAI's models shared hacking tips on a secret messaging board before Hugging Face breach.

The chart

"Today's large language models may be reminiscent of the ATMs of the 1980s - powerful tools that automate certain tasks but augment many more, making workers more productive and leaving the broader structure of work largely intact," says Adam Schickling, Vanguard's senior economist, sharing his chart. The proliferation of ATMs in that period allowed for more bank branches to open, keeping tellers in jobs, but mobile banking that came decades later meant more job losses for those workers, though it also generated new positions, he said. To date, mass AI-fueled layoffs among white-collar workers has yet to happen, which leads Schickling to believe "we remain closer to the ATM phase than the mobile banking phase."

Top tickers

These were the most searched ticker symbols on MarketWatch as of 6 a.m.:

 
Ticker  Security names 
SPCX    SpaceX 
NVDA    Nvidia 
MU      Micron 
TSLA    Tesla 
SNDK    Sandisk 
AMD     Advanced Micro Devices 
AAPL    Apple 
PLTR    Palantir 
TSM     Taiwan Semiconductor Manufacturing 
MSFT    Microsoft 

The Ming dynasty floating-crab cup is a marvel to behold.

-Barbara Kollmeyer

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08-06-26 0935ET