Nomura: Hong Kong hedge funds are optimistic about AI but hesitant to increase positions; Anthropic IPO may trigger an AI sell-off in October

Hong Kong's hedge fund managers are enduring a peculiar form of torment—showing profits on paper but not daring to increase their positions; bullish on AI, yet hesitant to chase the rally.

According to the Fast Trading Desk, a report published on August 24 by Nomura quantitative strategist Yoshitaka Suda documented his observations from meetings with 45 investors in Hong Kong last week. The majority of these investors are hedge funds—about 70% are fundamentally driven long/short funds, 20% are event-driven or quantitative long/short funds, and 10% are macro funds.

This report is part of Nomura's "Cross-Asset—Japan" series, focusing on the group of global hedge fund managers operating in Hong Kong with exposure to the Japanese stock market.

Profitable Year-to-Date, but July Drawdown Still Haunts

The report notes that these investors "generally appear fatigued."

Thanks to the rally before June, most still show clear positive portfolio returns year-to-date. However, the significant July drawdown has led many to adopt a "wait-and-see" attitude.

A minority performed well in July, and only a few saw both pre-June and July underperformance, resulting in substantial negative returns year-to-date.

It’s worth noting that even investors in platform-type hedge funds and multi-strategy funds with strong YTD performance are heavily constrained by internal incentive mechanisms— they must closely monitor their drawdown from peak levels. The report shows that during the recent steep reversal, almost no one opted to completely exit the market. Nomura points out that this may be partly because there are only a limited number of fund managers truly qualified for Japanese equity investment management.

AI Trend: Cautious Short-term, Bullish Long-term, but the "Tug-of-War" Isn’t Over

Most investors agree: cautious in the short term, still bullish on AI for the long haul.

Several investors observed that recent volatility is "entirely supply-demand driven," not a reflection of deteriorating fundamentals— "this is not a market you can just tough out by sticking to your fundamental views."

Long/short funds that performed well in the April-June AI rally largely reduced their total exposure during the July drawdown but maintained their AI overweight—making it clear they were "unwilling to add net new positions." Meanwhile, the size of Korean equity leveraged ETFs has shrunk sharply, options market makers’ hedging demand has stabilized, and implied volatility is starting to normalize—not only in Korean equities, but also for the Philadelphia Semiconductor Index (SOX).

For stock rotation within the AI theme, most respondents expect that the mid- to long-term focus will shift to "AI adopters" (companies using AI to boost their productivity). However, until then, the market will keep swinging between "hyperscalers" (the capital spenders on AI) and "AI enablers" (the cash recipients, namely semiconductor and data center companies).

Nomura compares this pattern to the internet bubble era: back then, telecom operators were the "spenders," and communications equipment companies were the "recipients." By contrasting historical and current price trends, Nomura believes "AI enabler" stocks have the potential to resume their upward move.

Anthropic IPO: AI Stocks May Rally in September, Plunge in October

Many investors are closely watching Anthropic's upcoming mega IPO. The report notes that some sources indicate the IPO could happen as early as October.

Nomura points out that this IPO differs from the massive SpaceX IPO both in fundamentals and in the scale of allocations to existing investors. However, if AI-related stocks trade similar to how aerospace concept stocks performed during SpaceX's listing, it is conceivable that AI stocks might outperform the market in September, boosted by enthusiasm from the Anthropic roadshow, but underperform in October as more investors cash out.

"Once such selling reaches a certain scale, AI stocks face the risk of panic selling by retail investors," the report states.

Although July saw a dramatic reversal, there has been little evidence of retail investors who bought on margin cutting their losses in significant numbers. Nomura warns: if losses on margin trading fall past -20%, the risk of stop-loss selling will spike rapidly.

Hyperscalers’ CDS Spreads Widen But Stock Prices Remain Steady

Currently, almost no investors are explicitly pricing in the end of the AI capex cycle.

Hyperscalers’ CDS spreads have recently widened again, but their stock performance remains relatively stable.

Meanwhile, concerns over rising global interest rates are mounting. US Treasury yields are climbing, but implied volatility in Treasuries remains low, making some investors uneasy. Inflation expectations in the bond market have rebounded but remain generally stable.

A rebound in shipping stocks has also triggered some inflation risk concerns among investors. However, Nomura, after directly comparing container freight rates with shipping stock returns, believes that the recent rebound in shipping stocks is mainly driven by short covering—the market’s previous over-expectation of normalization in container freight rates is fading.

SaaS Stocks Outperform Amid Rising Rates, Causing Investor Anxiety

Fears about AI’s disruptive risk remain largely unchanged.

For sectors that tumbled in February’s AI-driven selloff (such as software stocks), some investors selectively overweighted certain names, but hardly anyone is willing to overweight the entire sector over the longer term.

Even for stocks where short covering increased due to weak fundamentals, many investors are skeptical about whether rebounds, which already pushed prices beyond target levels, can be sustained.

Particularly concerning for investors: high-valuation SaaS stocks have continued to outperform even as rates rise. Nomura notes this is especially notable in Japan—before the market was led by the AI-driven rally, Japanese interest rates were actually a solid explanatory factor for SaaS excess returns, with the two exhibiting a strong long-term correlation. However, since July this relationship has clearly inverted, leaving market participants confused.

Bank Stocks: Value Plays and AI Hedge Tools

There are divided opinions about bank stocks.

The mainstream view is that after the Bank of Japan’s September meeting, there will be limited room for the market to price in further rate hikes. Still, some bullish voices suggest that if policy rates rise to 2%, a price-to-book ratio of 2x would not be surprising.

Many investors are simultaneously watching the AI trend—should AI stocks reverse again as they did in July, bank stocks could see renewed inflows.

Nomura points out that while banks are not always considered true value stocks, a strategy of simultaneously overweighting value and AI plays may still prove effective. During periods when AI-related positions are extremely concentrated, AI and value stocks may be negatively correlated; however, since last year, both have shown clear positive excess returns.

US Midterms: AOC Odds Surge, Markets Yet to React

Investors are showing strong interest in the US midterm elections.

According to betting market data, a previously expected split Congress is no longer the consensus; with the protracted Iran war, the Democrats winning majorities in both the House and Senate has become the base case.

Nevertheless, there’s no sign yet that investors are positioning around the midterms—whether in clean energy stocks (which typically benefit from a Democratic win) or AI-related stocks (which could face headwinds if the Democratic base opposes further data center construction).

Several Hong Kong investors expressed concern: precisely because the election is not moving markets yet, a sudden surge in midterm-related trading this autumn could trigger yet another reversal in AI stocks.

Nomura points out that even if the Democrats win both chambers, the Trump administration will remain in office. Additionally, the party has not yet formed a consensus around its candidate for the presidential election two years from now.

Worth noting is that the figure considered by the market as “concerning”—Democratic Congresswoman Alexandria Ocasio-Cortez (AOC)—has seen her odds of winning the Democratic presidential nomination surge dramatically in the past week or two. However, her probability is still only about 20%, so Nomura feels there’s no need for excessive worry just yet, but if her approval keeps rising, it could dampen market risk appetite.

By comparison, Hong Kong investors generally pay little attention to Japanese domestic politics. Nomura points out that the risk of Finance Minister Kaori Katayama being replaced has clearly diminished, so the market’s previous excess concern over Japanese political risk seems unwarranted.

CTA Waits on the Sidelines, Jackson Hole Limits Upside

In the Japanese stock market, high-dividend stocks have continued to outperform during the AI trade reversal (on a value-neutral basis), but Nomura believes further outperformance is limited, and strong trends are likely to last into early to mid-September.

CTAs (trend-following funds) currently maintain a wait-and-see stance on Japanese equities. Market makers’ gamma exposure has once again returned to net short.

With the Jackson Hole meeting approaching and event premiums rising, Nomura believes this week’s upside remains limited.

Nomura maintains its previous view: a full revival of fundamentally driven stock picking is more likely after the summer lull, in the following month.