Hedge funds investing in under-the-radar AI stocks, reducing exposure to megacaps

Hedge funds shift focus from megacap tech stocks to under-the-radar AI beneficiaries like Marvell Technology, Walgreens, and Freeport-McMoRan.

Hedge funds are shifting their focus in the wake of the artificial intelligence boom, according to a recent analysis by Goldman Sachs. The investment bank looked at the holdings of 707 hedge funds with a total of $2.7 trillion in gross equity positions at the beginning of the second quarter. What they found was a trend of hedge funds reducing their exposure to mega-cap tech stocks, while increasing their investments in lesser-known beneficiaries of the AI revolution.

Goldman's analysis focused on various aspects of AI technology, including infrastructure, enabled revenues, productivity, and power. They discovered that hedge funds were adding to their positions in under-the-radar winners in the AI space, particularly companies involved in AI infrastructure like Marvell Technology, TD Synnex, AES Corp, and Littelfuse. Additionally, hedge funds showed interest in companies like Walgreens Boots Alliance and First American Financial, whose productivity has been boosted by the use of AI. Copper miner Freeport-McMoRan and solar tracking company Nextracker, both involved in AI's power production, also saw increased popularity among hedge funds.

According to Ben Snider, Goldman's equity strategist, firms exposed to AI infrastructure investment have been performing exceptionally well and attracting a lot of attention from clients. As a result, the proportion of semiconductor stocks in U.S. hedge funds' long portfolios reached a record high of 6.5% in the first quarter. However, Nvidia, the chipmaker that has been a major beneficiary of the AI boom, has seen less interest from hedge funds following its significant rally.

All eyes are now on Nvidia's upcoming quarterly earnings report, with expectations of over 200% year-over-year revenue growth for the third consecutive period. Nvidia's shares have already surged more than 90% this year, following a 240% increase in 2023. Meanwhile, hedge funds have been reducing their positions in other mega-cap tech stocks such as Microsoft, Meta Platforms, and Amazon, despite their continued strong performance in 2024.

Interestingly, Apple was the exception among the so-called "Magnificent 7" group of tech stocks, as hedge funds actually increased their exposure to the company led by Tim Cook. Overall, the AI boom is reshaping the investment landscape, with hedge funds adjusting their portfolios to capitalize on the opportunities presented by this transformative technology.

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