AI stocks plunge triggers margin calls, Goldman Sachs and JPMorgan chase collateral from hedge funds.

```

The rapid plunge of artificial intelligence stocks is triggering a chain reaction on Wall Street. Major banks such as Goldman Sachs and JPMorgan have recently sent margin calls to hedge funds with highly concentrated positions, requiring them to provide additional collateral to maintain existing leverage levels. Analysts believe this indicates that the sell-off in the AI sector has spread from the market level to the realms of credit and risk management.

On Tuesday, the Nasdaq 100 index at one point dropped 10% from its record high in early June, briefly entering technical correction territory. SanDisk and Intel have fallen 53% and 39% from their peaks, respectively, and the Philadelphia Semiconductor Index has lost more than a quarter of its market value since the end of June. This sell-off, lasting about two weeks, has disrupted many hedge funds' previously heavy bets on the AI sector. Long/short strategy funds and multi-strategy funds fell 1.3% and 1.7% respectively by midday Tuesday.

On July 29, according to the UK’s Financial Times, the margin calls stem from the after-effects of hedge funds ramping up leverage in the first five months of this year. Goldman Sachs pointed out in a recent client report that the cumulative increase in total hedge fund leverage during those five months was the largest single uptick since it began tracking the data in 2016. This means that before the latest downturn, a large number of funds had already substantially increased their positions through borrowing, and any market reversal would multiply their losses.

Margin Call Mechanism: Automatically Triggered by Market Volatility

According to reports, sources revealed that both Goldman Sachs and JPMorgan have required some clients to provide more collateral. One person close to one of the banks said:

"This is the proper risk management practice for the current market, and is a fairly basic procedure."

The person added that many margin calls are automatically triggered by market volatility, a mechanism typically written into the agreements between funds and banks. When providing financing to hedge funds, banks build in protections to ensure they do not endure losses during downturns.

Prime brokers provide leverage to hedge funds by using stock portfolios as collateral, helping them amplify gains. However, if the market moves against a fund’s positions, leverage also multiplies losses. Risk committees at the banks continuously assess the positions of hedge fund clients and decide whether to adjust or limit the amount of leverage provided.

The report points out that the deeper root of the current wave of margin calls is that position concentration in the market has reached historic highs this year. According to Capital Group, the top ten components of the S&P 500 currently account for about 40% of the index's total market value, exceeding levels seen during the early 2000s internet bubble.

Goldman Sachs disclosed in another mid-year report that as of June 30, about 16% of its prime brokerage business exposure was directly to AI storage chip-related stocks. This figure highlights that, as AI sector concentration increases, the risk link between banks and their hedge fund clients has grown even tighter.

Risk Disclaimer and Limitation of LiabilityThe market involves risks and investment needs to be cautious. This article does not constitute individual investment advice, nor does it take into account the individual investment objectives, financial situation, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment is at your own risk. ```