Hedge Funds Shift Focus to Lesser-Known AI Beneficiaries, Dial Back on Megacap Tech Stocks: Goldman Sachs Analysis

Hedge funds are shifting their focus from megacap tech stocks to lesser-known beneficiaries of the artificial intelligence boom, according to a recent analysis by Goldman Sachs. The Wall Street investment bank examined the holdings of 707 hedge funds with a total of $2.7 trillion in gross equity positions at the beginning of the second quarter.

The analysis revealed that hedge funds have been increasing their investments in under-the-radar winners in the AI universe, particularly in areas such as infrastructure, enabled revenues, productivity, and power. Companies such as Marvell Technology, TD Synnex, AES Corp, and Littelfuse have seen a surge in interest from hedge funds due to their involvement in AI infrastructure.

Walgreens Boots Alliance and First American Financial were also among the companies that hedge funds flocked to last quarter, as their productivity has been enhanced by the use of AI. Copper miner Freeport-McMoRan and solar tracking company Nextracker, both involved in AI’s power production, have also seen increased popularity among hedge funds.

According to Ben Snider, Goldman’s equity strategist, firms exposed to AI infrastructure investment have recently performed the best and captured the most interest in client conversations. 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 proven to be less popular with hedge funds after its significant rally. Nvidia’s quarterly earnings report, expected to be released postmarket on Wednesday, is anticipated to show year-over-year revenue growth exceeding 200% for a third consecutive period. The company’s shares have surged more than 90% this year after a remarkable 240% increase in 2023.

In contrast, hedge funds have reduced their positions in other megacap stocks benefiting from the AI enthusiasm, such as Microsoft, Meta Platforms, and Amazon. These companies have continued to experience strong rallies in 2024, with their shares rising between 15% and 33%. The exception in this group is Apple, as hedge funds have increased their exposure to the tech giant led by Tim Cook.

Overall, the AI boom is reshaping the investment landscape for hedge funds, with a shift towards lesser-known beneficiaries and away from the traditional megacap tech stocks that have dominated the market in recent years. Investors will be closely watching how these trends continue to evolve in the coming months.