To understand the woes of hedge-fund managers this week, look no further than the stock of Toyota, the Japanese carmaker.

Hedge funds have been betting on an AI revolution by buying stocks tied to artificial intelligence and hedging their positions by wagering that non-AI names like Toyota would fall or at least not rise as much, hedge-fund investors say.

As yesterday's AI selloff gained momentum, it triggered so-called margin calls, or automated selling at certain prices, prompting more selling and steepening the losses.

At the same time as their long positions were taking a beating, hedge-fund managers were also scrambling to contain losses on the other side of their bets.

As investors pulled money out of AI trades, they piled into stocks like Toyota, which had its best day since 1987. Part of that gain was attributed to investors hoping the Democratic win in the U.S. could lead to lower tariffs and a drop in oil prices, both of which would help the Japanese carmaker.

But it also reflected money managers rushing to buy back shares in the company that they had previously shorted, hedge-fund investors say, driving up its stock price and triggering what's commonly known as a short squeeze.

Shorting involves a bet against stock by either borrowing shares to sell them, or through derivatives granting the buyer the right to sell an asset at a specific price.