Hedge Funds Sell Chip Stocks for Fourth Straight Week as AI Rally Loses Steam

Hedge funds cut chip exposure for a 4th week as AI bets fade Hedge funds cut their positions in chip companies for a fourth consecutive week, taking a bearish view on the AI-powered companies as investors rethink valuations after a slump in the sector. Hedge funds remained net sellers of chipmakers last week, according to trading data compiled by Goldman Sachs. This marks a four-week trend of outflows from semiconductor stocks, with the pace accelerating in the most recent week amid a retreat in artificial-intelligence shares from record highs.

Chip makers led global stock markets through much of the past two years.

Driven by ballooning demand for AI infrastructure, the semiconductor sector surged for two years with share gains powered by unprecedented spending on the infrastructure that allows companies to harness artificial intelligence technology. Still, this run in semiconductors is not a function of declining AI demand but rather changing market sentiment, a Goldman Sachs note from Sunday revealed. Many portfolio managers have booked gains, and are looking to redeploy capital into sectors that, on average, look cheaper. The companies' recent sell-off “has put them in a more vulnerable position” due to elevated share prices.

Semiconductors at the forefront of the AI craze Chip manufacturers ranging from GPU, memory and networking hardware producers, to specialized AI chip creators have captured a windfall as tech giants and government agencies invest heavily in AI systems.

But these gains have stalled recently, with investors increasingly questioning the durability of future AI spending. It is not a collapse of demand but rather a more "orderly correction". Questions have mounted about when significant returns from massive investments into data centres, training computers, and infrastructure will materialize and whether they are still justified at present valuations.

In response to those questions, hedge funds have " trimmed their exposure to the sector's 'crowded trades,'" the note said, using industry terminology to describe popular holdings that tend to attract the most capital. Portfolio managers, whose job is to be nimbler than a benchmark index, frequently take profits in well-performing stocks after protracted runs to avoid having to sell at distressed prices if and when trends shift, and also to manage overall risk in their portfolios." The long-term case for AI infrastructure spending remains strong" analysts wrote, even though some funds have pared holdings.

"This is underpinned by continued business expansion into applications such as generative AI, autonomous systems, data analytics, and cloud infrastructure.”

“There's a still enormous investment happening," noted Sean Smith, an analyst at Goldman Sachs. The recent sell-off has "opened up opportunities for more value-oriented investors" - but only if a given company can “clearly show you the path to profits from that. The shift in hedge fund behavior is a reminder of how dynamic trading desks are, with many managers looking to balance thematic opportunities with traditional stock selection methods. Their caution underscores the difficulty even highly sophisticated traders have in predicting the precise timing of sector turns.