Hedge funds split on AI rally as valuations rise

Hedge funds are divided over whether to stay exposed to the AI-led equity rally or to cut risk after technology valuations rose sharply and performance varied widely across managers.

Viking Global Investors has reduced net exposure to below its historical average. Founder Andreas Halvorsen warned that elevated valuations, large corporate capital spending tied to AI and a fragile macroeconomic backdrop leave limited margin for error, citing persistent inflation, geopolitical uncertainty and slowing growth.

Renaissance Technologies has moved to more defensive positions after its quantitative models signalled an increased risk of a market pullback following an extended rally.

Other firms have maintained heavy technology bets. Coatue Management’s large-cap tech holdings have been a primary source of gains this year. Portfolio managers at Avala Global and Whale Rock reported that technology-heavy allocations drove outsized returns for their funds.

Industry data show most technology-focused hedge funds remain net long US tech equities at levels above historical averages. At the same time, performance dispersion across funds has widened, with returns increasingly dependent on holdings in a narrow group of companies linked to AI adoption.

Recent volatility underlined that sensitivity. Sharp drawdowns in major indexes such as the Nasdaq 100 during tech-led selloffs exposed how concentrated positions in a few mega-cap names can amplify swings in fund performance. Managers that trimmed exposure have in some cases trailed peers that stayed fully invested during the rally.

More cautious investors have pointed to the scale of corporate spending on AI infrastructure and the risk that revenue gains may lag expectations, which could pressure margins if growth slows or inflation persists. Quantitative firms cited model signals as the reason for protective positioning.

Managers across the industry are balancing the decision to lock recent gains against the choice to keep exposure to further AI-driven upside. The split in positioning has produced clear differences in returns among hedge funds as market leadership and valuation dynamics continue to change.