Hedge funds take AI profits

Following a rally in semiconductor stocks tied to AI, hedge funds are rebalancing their portfolios and reassessing risk.

Over the past week, hedge funds across the globe have been taking profits on their investments in semiconductor stocks following a recent rally, according to a Goldman Sachs Global Banking & Markets report.

Semiconductors and related equipment has become the most net-sold U.S. subsector in the past month and is now modestly net sold on the year, the report said.

Vincent Lin, co-head of Prime Insights and Analytics, speculated that the selling, which is clustered around U.S. semiconductor and equipment names, likely reflects risk and portfolio rebalancing by certain types of hedge funds.

"As chip stocks rally, semiconductor investments have mechanically increased as a share of portfolios for some managers," Lin said. "From a risk-management perspective, certain funds will need to sell semiconductor stocks to manage their exposure to the sector."

While the cause for the sales may well be to do with risk management, investors are increasingly becoming aware of the sector's exposure to China, both as a critical end market and as a flashpoint in the U.S.-China technological arms race.

For example, tighter U.S. export restrictions on advanced chips to China could begin to weigh on growth expectations for many chipmakers that continue to generate significant revenue from Chinese customers. Geopolitical risks tied to supply chains, export controls, and the possibility of further escalation in U.S.-China tensions could begin to be reflected in the markets.

Indeed, Goldman Sachs noted that hedge funds are deploying capital into relevant software and internet companies with less exposure to trade restrictions.

However, while geopolitical risks certainly remain, the soaring valuations of AI-related equities is unlikely to fade in the short term.

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