Banks ask hedge funds for more collateral as AI stocks fall

In short: Big Wall Street banks are asking some hedge funds to put up more collateral as AI-related tech stocks fall and risks look more concentrated.

What's going on

A popular trade for hedge funds this year was to buy shares in companies tied to AI, especially chip and memory makers. Goldman Sachs said that by the end of June, about 16 percent of its prime brokerage exposure was linked to cyclical memory stocks, up from less than 2 percent a year earlier.

Now those stocks are dropping, and the same trade is moving the other way. The Nasdaq 100, a major index of large tech companies, briefly moved into “correction” territory this week, which usually means it fell about 10 percent from a recent high.

The Financial Times reported that banks including Goldman Sachs and JPMorgan have recently asked hedge fund clients to post more collateral. Collateral is like a security deposit, it is extra money or assets that reduce the bank’s risk if a client’s bets go bad.

Some of the biggest AI-linked names have seen sharp declines. The article notes that SK Hynix has fallen more than 24 percent since its US listing earlier this month. It also says Sandisk and Intel are down 54 percent and 39 percent from their peaks, respectively.

What to watch

Investors are also watching stress signals in corporate debt markets. For example, the cost of “credit default swaps” has risen for some companies, which is like paying more for insurance against a borrower not paying its debts. If stock prices keep falling and borrowing costs keep rising, more funds could be forced to reduce their bets quickly, which can push prices down further.

Source: Financial Times