(Bloomberg) — Hedge funds are unloading software stocks as concerns mount about who’ll be left behind in the artificial intelligence boom.
Most Read from Bloomberg
Last week, funds sold information technology shares by the most in 11 weeks, with software accounting for more than 60% of it, according to Goldman Sachs Group Inc.’s prime brokerage desk report for the week ended May 31. Hedge funds’ net exposure to software is now the lowest it’s been in more than five years, according to Goldman.
“A number of managers spoken to by PivotalPath have rotated out of software as a service (SaaS) stocks in favor of AI/semis,” said Jon Caplis, chief executive officer of hedge fund research firm PivotalPath. “In part, it’s driven by the huge interest in AI processing power and a slowdown of SaaS subscriptions.”
Hedge funds are trimming their general exposure to megacap technology stocks. But they’re also betting on firms that will benefit from the AI expansion. Semiconductors and semiconductor equipment was the only net bought tech subsector last week, according to Goldman, giving the funds their highest single-stock exposure to group in more than five years.
While the S&P 500 Information Technology Index is up 17% this year, there’s a wide divergence in performance at the sector level. Specifically, the S&P Semiconductors and Semiconductor Equipment index has soared 57% this year, while the S&P Software and Services index is up just 2.2%.
“Apart from Microsoft Corp., we don’t expect the majority of large-cap software companies to benefit from AI in the near term” said Anurag Rana, senior technology analyst at Bloomberg Intelligence.
D.A. Davidson analysts said software stocks related to artificial intelligence are due for a “trough of disillusionment.” The industry also is struggling with a souring macroeconomic environment and geopolitical risks that are prompting companies to delay their upgrade plans.
So with the push for AI showing no signs of slowing, as seen by Nvidia Corp.’s continuing rocket ride, hedge funds appear to be most comfortable putting their money in chips, at least for the time being.
“Chip stocks should continue to be the story heading into the second half of 2024 as the demand remains high and innovation in the space continues at a rapid space,” said Jay Woods, chief global strategist of Freedom Capital Markets. “Nvidia continues to lead and the others are following.”
–With assistance from Ryan Vlastelica.
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.