AI "altitude sickness" spreads: Global investors are searching for every means to hedge against three years of AI frenzy

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The AI bears, dormant for three years, are awakening. As the artificial intelligence frenzy pushes the stock market to dizzying heights, skeptical investors are actively seeking ways to profit from what they see as an inevitable market shakeout.

According to The Wall Street Journal, traders are betting that the massive AI investments by tech giants will fail to yield equivalent returns. From shorting chip manufacturers and the debts of tech giants to engaging in off-market wagers against private startups, Wall Street is searching for every possible means to hedge against the potential risks brought by the AI craze.

This strategic shift reflects growing anxiety over the ultimate outcome of AI infrastructure construction. Investors are starting to worry that tech giants may never be able to realize enough profit to support their enormous AI spending commitments and lofty valuation levels.

However, the paths to hedge these risks are facing challenges. Given that AI concept stocks are highly prone to surges from positive news, directly shorting shares carries massive risk of being squeezed, forcing bearish institutions to turn to the bond market and derivatives for relatively safer targets.

Avoiding Stock Risks, Targeting Giant Debts

Faced with the tech giants' cost-no-object spending, shorting corporate debt is becoming a steadier hedge. Companies like Amazon and Alphabet are expected to invest as much as $670 billion this year in AI infrastructure, sparking concerns about their cash flow.

JonesTrading Chief Market Strategist Michael O’Rourke noted:

“People are now more willing to short mega-scale cloud computing providers because they are sacrificing their free cash flow. This is a significant change, and also a significant risk.”

Bank of America strategist Michael Hartnett has begun urging clients to short the bonds of giants like Oracle, Meta Platforms, and Microsoft. Some traders prefer targeting AI-related debt because this market has fewer retail investors, helping to prevent meme-stock-style surges and protecting short positions from being squeezed.

Multiple Approaches: From Oracle to Supply Chains

In terms of directly shorting stocks, Oracle has become one of the main targets for bears. According to FactSet data, as of January 30, more than 2% of Oracle’s shares were shorted, up from about 1.5% a year earlier. This reflects market worries about the company’s plans to raise as much as $50 billion this year to build AI infrastructure.

Oracle’s $300 billion computing power sales agreement with OpenAI also makes it a surrogate short target. “Shorting Oracle is shorting OpenAI,” said Michael O’Rourke.

Meanwhile, some investors are starting to build short positions against derivative companies in the AI supply chain. Well-known short investor Jim Chanos recently shorted renewable energy company Ormat Technologies. Ormat had recently reached an agreement with Google to provide geothermal power for its expanding operations in Nevada. Chanos told clients that, given the high costs, the company is very likely to lose money on this deal.

Shorting AI chip leader Nvidia is also beginning to emerge. Stanphyl Capital Partners hedge fund manager Mark Spiegel previously shorted Nvidia stock, expecting that chip sales will slow as concerns grow over the giants’ massive capital expenditures. Although he recently closed the position at a slight loss, he said he is preparing to reestablish his short position.

Off-Market Wagers and Historical Shadows

For core AI companies not yet listed, investors are even engaging in private legal contracts for bets. OpenAI reached a valuation of $830 billion in its latest funding round and is expected to go public later this year. QVR Advisors fund manager Benn Eifert has signed private contracts with tech professionals to wager on OpenAI’s ultimate valuation. If OpenAI’s valuation exceeds $300 billion a year after its IPO, Benn Eifert will lose millions; if it is below that figure, he will profit.

This pessimism is not isolated. Michael Burry, the famous short investor who successfully predicted the subprime crisis, recently compared the AI frenzy with the early internet bubble.

Yet, channels for establishing large-scale bearish positions remain limited. After suffering huge losses in the 2008 real estate crisis, banks have become extremely cautious about acting as counterparties for large bearish bets. Back then, John Paulson made $15 billion in profit by shorting high-risk mortgage loans.

Moreover, the extreme volatility of AI stocks has deterred many institutions. Jack Ablin, chief investment strategist at Cresset Capital, admitted:

“I don't have the guts for this. I'm not ready to deal with stocks that can surge right in front of me just because of one piece of positive news.”

Risk Warning & DisclaimerMarkets have risks; investment requires caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinion, view, or conclusion in this article fits their particular circumstances. Investing according to this article is at one’s own risk. ```