Hedge funds split on AI: some cut exposure, others press on

Hedge funds are divided over the AI-led technology rally. Some established firms have reduced exposure while others kept large positions, producing a wide gap in returns this year.

Viking Global Investors has cut net exposure to below its historical average. Founder Andreas Halvorsen warned investors: “Elevated valuations, heavy capital expenditure linked to AI investment and a fragile macro backdrop leave limited margin for error.” He highlighted persistent inflation, geopolitical uncertainty and slowing growth as risks. Renaissance Technologies’ quantitative models have shifted to anticipate a potential pullback after the extended rally.

Funds that maintained concentrated positions in large-cap technology stocks tied to AI have reported strong performance this year. Coatue Management posted substantial gains driven by exposure to major tech platforms benefiting from AI spending. Managers including Divya Nettimi at Avala Global and Alex Sacerdote at Whale Rock attributed technology-heavy allocations as the primary source of outsized returns.

The market has shown how sensitive the trade is. Sharp sell-offs in indexes such as the Nasdaq 100 caused significant drawdowns when sentiment toward a small group of mega-cap names turned negative. That volatility has increased dispersion in hedge fund returns, with winners concentrated among funds that captured the top AI-linked stocks and laggards among those that de-risked early or did not hold the biggest positions.

Industry exposure data show most technology-focused hedge funds remain net long the sector, with US tech allocations above historical averages. At the same time, returns are becoming more dependent on positioning within a narrow group of AI-linked winners, raising single-stock and sector concentration risk for some managers.

Managers who reduced exposure cited stretched valuations and a fragile macro outlook. Bullish managers point to continued AI adoption and rising earnings potential at leading platforms. Fund managers are monitoring capital expenditure patterns, earnings reports from major technology firms and market liquidity to guide short-term positioning.

Performance dispersion is likely to remain elevated while the market assesses valuation and growth prospects for AI leaders and watches inflation, macro data and geopolitical developments.