One of the most intense rounds of selling by professional speculators since the financial crisis is fueling the hammering in technology stocks that began to expand into the broader market on Wednesday.
Hedge funds began the new year by uploading software and chipmakers at a frenetic pace, after spending December unloading high-growth, high-valuation equities. According to data provided by Goldman Sachs Group Inc.’s prime broker, these sales hit their greatest level in dollar terms in more than ten years during the four sessions through Tuesday.
The tech meltdown intensified after minutes from the Federal Reserve’s most recent policy meeting revealed “a more hawkish Fed than some may have expected,” according to Mike Loewengart, managing director of investment strategy at E*Trade Financial.
The Nasdaq 100 Index fell more than 3%, completing its worst two-day decline since March. Stocks with exorbitant valuations took the brunt of the selling, with a Goldman basket of high-priced software falling 6.3 percent to its lowest level since May.
On Thursday, the MSCI Asia Pacific Communication Services Index fell as much as 1.5 percent, with Kakao Games Corp. of South Korea leading the way with a 13 percent decline. At the mid-day break, Hong Kong’s Hang Seng Tech Index, which primarily followed Chinese heavyweights, was down 0.6 percent. On Wednesday, the index fell 4.6 percent, putting it near oversold territory.
Concerns about rate hikes cause Asian tech stocks to extend their global rally.
“The Fed will raise rates this year, probably more forcefully than many expected,” Mark Freeman, a chief investment officer of Socorro Asset Management LP, said. “Because there is minimal support from the long-only community in many of these tech firms, it doesn’t take much-selling pressure to push the shares sharply lower, forcing hedge funds to sell even more.”
The threat of increasing borrowing costs caused traders to reconsider their long-held fondness for technology companies. Hedge funds, whose concentrated wagers on speculative software were still elevated even after unwinding some of those positions late last year, were caught in the crossfire. Long-short fund customers at Goldman Sachs experienced their biggest alpha drawdown, or below-market returns, in a year on Tuesday.
The tech thrashing began as a rotation even before the Fed minutes were released, with big investors selling one-time highfliers to acquire companies poised to benefit from a stronger economy. During the preceding four sessions, Goldman’s hedge-fund clients purchased airlines, oil, and industrial stocks. As a result, their technology exposure to the S&P 500 fell to the bank’s lowest level ever.
Overly stretched stocks may struggle to justify their valuations as the Fed becomes more hawkish and Treasury yields rise. According to Bernstein data, over one-third of all tech stocks were recently traded at more than ten times their revenues. According to Bloomberg data, the S& P 500 was valued at 3.2 times sales.
“These unwinds are ultimately a result of positioning and suffering when there is no valuation support for a full third of the sector,” said Benjamin Dunn, head of Alpha Theory Advisors LLC.