AI "Acrophobia" Spreading: Global Investors Are Searching for Ways to Hedge Against Three Years of AI Frenzy

The AI short sellers who have been dormant for three years are awakening. As artificial intelligence enthusiasm pushes the stock market to dizzying heights, skeptical investors are actively seeking profit opportunities to hedge against what they see as inevitable market shakeouts.

According to The Wall Street Journal, traders are betting that the massive AI investments by tech giants will not yield equivalent returns. From shorting chip manufacturers and tech giant debt to over-the-counter bets on private startups, Wall Street is exploring all possible means to hedge the potential risks brought by AI frenzy.

This strategic shift reflects growing market anxiety over the ultimate outcome of AI infrastructure development. Investors are beginning to worry that tech giants may never generate enough profit to support their enormous AI spending commitments and sky-high valuations.

However, hedging these risks faces significant challenges. Given that AI concept stocks are highly susceptible to positive news and can surge rapidly, directly shorting stocks carries a substantial risk of short squeeze, prompting short-selling firms to turn to bonds and derivatives for safer targets.

Avoiding Stock Risks, Targeting Debt of Giants

In response to the relentless investments by tech giants, shorting corporate debt has become a more prudent hedging approach. Companies like Amazon and Alphabet are expected to invest up to $670 billion this year in AI infrastructure, raising concerns about cash flow.

JonesTrading Chief Market Strategist Michael O’Rourke noted:

“People are now more willing to short large cloud service providers because they are sacrificing their free cash flow. This is a major shift and a significant risk.”

Bank of America strategist Michael Hartnett has begun urging clients to short bonds of Oracle, Meta Platforms, and Microsoft. Some traders favor targeting AI-related debt because the retail investor presence in that market is smaller, helping to prevent a meme-stock-like surge and protecting short positions from being squeezed.

Multiple Strategies: From Oracle to Supply Chain

Regarding direct stock shorting, Oracle has become a key target. According to FactSet data, as of January 30, more than 2% of Oracle’s shares are short, up from about 1.5% a year earlier. This reflects market concerns over the company’s plan to raise up to $50 billion this year to build AI infrastructure.

Oracle’s $300 billion worth of compute sales agreements with OpenAI also make it an alternative target for shorts. “Shorting Oracle is like shorting OpenAI,” said Michael O’Rourke.

Meanwhile, some investors are establishing short positions on derivative companies in the AI supply chain. Noted short-seller Jim Chanos recently shorted renewable energy firm Ormat Technologies, which recently signed an agreement with Google to supply geothermal power for its expanding Nevada operations. Chanos told clients that, given the high costs, the company is likely to incur losses on this deal.

Short positions on NVIDIA, a leading AI chipmaker, are also emerging. Stanphyl Capital Partners hedge fund manager Mark Spiegel previously shorted NVIDIA stock, expecting that as investor concerns over the company’s massive capital expenditures grow, chip sales will slow. Although he recently closed his position at a slight loss, he said he is preparing to re-establish shorts.

Over-the-Counter Bets and Shadows of the Past

For unlisted core AI companies, investors are even making private bets through legal contracts. OpenAI’s recent funding round valued the company at $830 billion, with plans to go public later this year. QVR Advisors fund manager Benn Eifert has entered private agreements with tech professionals to bet on OpenAI’s eventual valuation trajectory. If OpenAI’s valuation exceeds $300 billion one year after its IPO, Eifert will lose millions; if it’s below, he will profit.

This pessimism is not isolated. Renowned short-seller Michael Burry, who successfully predicted the subprime mortgage crisis, has recently compared the AI frenzy to the early internet bubble.

However, channels for establishing large-scale bearish positions remain limited. After suffering huge losses during the 2008 housing crisis, banks became extremely cautious about acting as counterparties for large short bets. Back then, John Paulson made $15 billion by shorting risky mortgage-backed securities.

Additionally, the extreme volatility of AI stocks deters many institutions. Cresset Capital Chief Investment Strategist Jack Ablin admitted:

“I don’t have the nerve. I’m not ready for stocks that can surge on a good news headline right in front of me.”

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