- The emergence of Chinese AI darling DeepSeek led to a sell-off of stocks like Nvidia, Tesla, and Alphabet.
- There was a market rout of hundreds of billions of dollars thanks to the introduction of DeepSeek's open-source AI models.
- Hedge funds have been cutting their exposure to the Magnificent 7 stocks for half a year, Goldman Sachs said.
DeepSeek — the Chinese AI company that has upended the US tech industry with its open-source models — caused the US stock market to lose hundreds of billions of market value within a day.
The pain was felt by stockholders of the biggest names of the past couple of years: Nvidia, Tesla, Alphabet, and more. Those mega-cap companies and the rest of the so-called Magnificent 7 were the driving force behind the S&P 500's 23% gain in 2024 and became must-haves for many hedge funds.
Except those hedge funds started to crystallize some of their gains before the recent sell-off.
A Goldman Sachs report from the bank's prime services unit, which caters to the biggest hedge funds in the world, said managers had been selling out of Magnificent 7 stocks steadily since June of last year. Exposure to these stocks was at the lowest levels since mid-2023, the report notes, after hitting a high last summer.
"Mag7 stocks collectively now make up ~15.5% of total US Net exposure," the January report states. In June, it was at 21%.
Thanks to the sell-off, there was likely still plenty of pain across midtown Manhattan and Greenwich, though the extent won't be known until funds' January returns trickle out.
Regulatory filings on hedge funds' holdings are delayed, so it can be difficult to gauge what funds are doing in real time. But these filings provide a snapshot of how invested managers were at a certain point in time — and who got out before disaster struck.
A review of the filings revealed several big names that moved in and out of these stocks.
For example, Mala Gaonkar's SurgoCap Partners sold its stakes in Microsoft and Nvidia during the third quarter while adding a large position in Meta, which has been mostly unaffected by the sell-off. Billionaire Stanley Druckenmiller's family office also liquidated nearly all of its Microsoft and Nvidia holdings over the same period.
Philippe Laffont's Coatue sold large chunks of its Nvidia and Meta positions but added to its Microsoft, Amazon, and Alphabet stakes. Alex Sacerdote's Whale Rock trimmed its Meta, Nvidia, and Alphabet holdings, but added to its largest position, Amazon, in the third quarter.
The already-busy year for Magnificent 7 stock analysts will not slow down anytime soon — Microsoft, Meta, Tesla, and Apple are all set to report earnings later this week.