Hedge funds have been selling the scorching rally in US semiconductor stocks to book profits, while keeping their overall exposure to the AI theme, according to traders at Goldman Sachs Group Inc.
Semiconductors and semiconductor equipment was the most net-sold US subsector over the past month, Goldman’s prime desk said in a client note.
At the same time, the funds increased their short wagers on US equity macro products, index and exchange-traded-fund instruments used to hedge against broader market risks. These short positions are now at a 10-year high.
“This points to refrain and managing semis’ exposures within the overall portfolio amid the group’s explosive price rally, not a regime shift away from the AI theme,” the team led by Vincent Lin wrote. Overall exposure to US artificial intelligence stocks tracked by Goldman’s technology, media and telecommunications AI basket remains near record highs.
The profit-taking in semiconductor stocks follows a near-vertical rally for these names, with Goldman’s AI semiconductor basket up more than 50% relative to the S&P 500 Index year-to-date. The S&P 500 itself had risen more than 18% since late March before a three-day pullback that was snapped on Wednesday.
South Korea’s Kospi Index, a focus of the global frenzy for AI infrastructure stocks, briefly crossed 8,000 points for the first time on May 15, taking its year-to-date gains beyond 80%, before falling about 12% from its intraday peak to a low this week.
Cuts to semiconductor stock holdings by hedge funds in the past month were driven by reducing long positions, the Goldman traders said. The sector is now net sold year-to-date.
Read more: SOX Surge Echoes Prior Semiconductor Bubble Eras: Equity Insight
“Over the past month, managers have 1) actively unwound risk in US tech stocks against the price rally, 2) retained a cautious stance across most of the cyclical pockets, and 3) more recently started to hedge beta exposures again via macro products amidst higher inflation prints and rising bond yields,” the prime team said.
Within these moves are signs that funds have rotated, rather than retreated. Asia, both developed and emerging, was the most net-bought region in May and also year-to-date, led by China, Japan, Hong Kong and Taiwan. North America was by far the most net-sold.
Overall gross leverage rose 10 points month-to-date to a fresh five-year high, although net leverage has barely moved and sits in the 58th percentile on a three-year lookback, the Goldman team said.
They described this setup as inconsistent with euphoria, in contrast to the bullish behavior seen among retail traders in volatility skews and in leveraged ETF flows.
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