Hedge funds unwind AI bets as tech selloff accelerates

Hedge funds have rapidly withdrawn all of their investments in artificial intelligence stocks since the start of 2025, according to Goldman Sachs prime brokerage data. This sudden shift occurred within just five trading days as worries about high valuations and the viability of AI investments triggered a significant reduction in tech-related holdings, The Financial Times reported.

Approximately $20 billion in tech stock sales over two weeks followed a similar $23 billion outflow during a major rebalancing in July. Hedge fund managers sold their existing long positions at a rate 3.5 times higher than new short selling, indicating a focus on trimming down exposure rather than adopting outright bearish stances against the sector.

The effect on hedge funds portfolios was substantial, with the basket of stocks they favor falling 4.2% on October 22, the steepest single-day drop since 2011. Morgan Stanley data revealed that hedge funds reduced their overall exposure by 7.8%, the largest decline since their tracking began in 2016. AI infrastructure firms, including Samsung Electronics, SK Hynix, Micron, and SanDisk, suffered particularly sharp losses, witnessing the combined loss of over $700 billion in market value within two weeks.

Semiconductor shares declined 15.6% in October, compared to a mere 1% drop for the S&P 500, as investors questioned whether the substantial AI capital expenditure would lead to sustainable earnings and cash flows. Despite this sell-off, hedge funds still maintain considerable exposure to the technology sector, accounting for 23.5% of Goldman Sachs' global prime brokerage book, which places their allocation in the 90th percentile of their past five-year history.

The shift in positioning suggests a broader reduction in risk appetite rather than a complete withdrawal from AI-related investments, as managers reassess popular trades and increasingly prioritize company fundamentals and the profitability of AI infrastructure spending.