Traders Cite Hedge-Fund Liquidations as a Driver of U.S. Stock Selloff

Thursday’s steep decline in U.S. stocks may have been driven by hedge funds unwinding positions, a development that could matter to crypto markets if forced selling spreads across risk assets.

Traders and analysts have pointed to hedge-fund liquidations, rather than weaker corporate fundamentals, as the main explanation for the move. Noel Smith, co-chief investment officer at Kai Asset Management, said a decline of this scale without major market news suggested forced unwinds.

Market expectations include several funds being wound down entirely and investment teams inside multi-strategy firms being made to close positions. Those teams, often called pods, operate independently inside a larger fund; shutting one can trigger the sale of its positions without ending the entire firm. The crypto-market concern is that forced selling could spill into other risk assets.

A similar episode unfolded in July, when AI-focused hedge fund Situational Awareness lost 67% of its assets before striking an emergency exit deal with Citadel. The deal involved selling most of the fund’s publicly traded stock holdings at a discount.