Key Takeaways
- • Hedge funds are underweight the broad AI trade for the first time since early 2023, according to LPL Research analyst Michael McClain, citing trading data from Goldman Sachs and Morgan Stanley.
- • Hedge fund gross exposure has fallen about 8% from its June peak, which LPL calls the largest sustained stretch of long/short stock de-risking in more than 15 years.
- • Managers sold existing long positions roughly 3.5 times faster than they opened new shorts, which LPL characterizes as liquidation and risk reduction rather than a broad bearish call.
- • The information technology sector fell 8.2% and the Russell 1000 Growth index dropped 4.8% in the week ending Nov. 6, per LPL Research.
- • LPL warns that the Nov. 11 AI rebound, led by CoreWeave's 25% gain, may be driven by short covering and could fade without participation from fundamental investors.
Summary
Hedge funds have moved to an underweight position in the broad artificial intelligence trade for the first time since early 2023, according to LPL Research. In a note published Wednesday, LPL analyst Michael McClain cited trading data from Goldman Sachs and Morgan Stanley to support the conclusion. The shift follows a difficult week for AI-linked equities: for the week ending Nov. 6, the information technology sector fell 8.2% and the Russell 1000 Growth index declined 4.8%.
The de-risking did not begin last week. Hedge funds' gross exposure, the combined value of their long and short bets, has fallen about 8% from its June peak. LPL described the pattern as the largest sustained stretch of long/short stock de-risking in more than 15 years. Managers sold stocks they already owned roughly 3.5 times faster than they opened new short positions. LPL concluded that this pattern "indicates liquidation rather than a broad expression of a negative fundamental view." Crowding amplified the move, as AI names had become among the most widely held stocks across both hedge funds and traditional funds.
AI stocks rebounded on Wednesday after CoreWeave reported strong results and raised its revenue forecast. CoreWeave rose 25%, Dell Technologies gained 12%, Oracle rose 9%, and the Invesco QQQ Trust, which tracks the Nasdaq-100, advanced 2.3%. LPL cautioned that part of the buying may reflect hedge funds covering short positions, which "may fade if fundamental investors do not participate." It recommended monitoring whether hedge fund exposure continues to shrink and whether the rally broadens beyond a handful of AI leaders.
The Motley Fool, which republished the analysis via The Globe and Mail, advised that most long-term investors should not follow hedge fund selling, since those managers often sell due to leverage, risk limits, or short-term performance pressures. It suggested investors with concentrated AI holdings consider diversifying across other tech stocks and sectors. Quoting LPL, the piece said lower hedge fund exposure "may eventually create a healthier opportunity set," but that "low exposure alone is not a buy signal."
The de-risking did not begin last week. Hedge funds' gross exposure, the combined value of their long and short bets, has fallen about 8% from its June peak. LPL described the pattern as the largest sustained stretch of long/short stock de-risking in more than 15 years. Managers sold stocks they already owned roughly 3.5 times faster than they opened new short positions. LPL concluded that this pattern "indicates liquidation rather than a broad expression of a negative fundamental view." Crowding amplified the move, as AI names had become among the most widely held stocks across both hedge funds and traditional funds.
AI stocks rebounded on Wednesday after CoreWeave reported strong results and raised its revenue forecast. CoreWeave rose 25%, Dell Technologies gained 12%, Oracle rose 9%, and the Invesco QQQ Trust, which tracks the Nasdaq-100, advanced 2.3%. LPL cautioned that part of the buying may reflect hedge funds covering short positions, which "may fade if fundamental investors do not participate." It recommended monitoring whether hedge fund exposure continues to shrink and whether the rally broadens beyond a handful of AI leaders.
The Motley Fool, which republished the analysis via The Globe and Mail, advised that most long-term investors should not follow hedge fund selling, since those managers often sell due to leverage, risk limits, or short-term performance pressures. It suggested investors with concentrated AI holdings consider diversifying across other tech stocks and sectors. Quoting LPL, the piece said lower hedge fund exposure "may eventually create a healthier opportunity set," but that "low exposure alone is not a buy signal."
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