The AI Trade That Cost $45 Billion

The AI Trade That Cost $45 Billion

The S&P 500 finished July down 0.1%, however a narrative change happened in the AI trade that took out a $45 billion public equity portfolio of a hedge fund.

The trade is to own the companies building AI infrastructure and to avoid the enterprise software companies that AI is supposed to replace. Micron, which makes the memory chips that go inside AI servers, was up 188% on the year. Adobe was down 28% and Salesforce was down 30%.

Then in four weeks Micron fell 28.7% and CoreWeave fell 27.9%, while Adobe rose 22.1% and Salesforce rose 17.5%.

Memory is still scarce, compute is still scarce, capital spending guidance still went up, and what happens to enterprise software is undetermined. What actually happens with a trade that works for six months is it gets crowded (too many investors holding the same position), and crowded positions can sell-off for no reason other than it ran out of buyers.

And last week that reversal cost a $45 billion hedge fund its entire stock portfolio.

Until next week,
Jacob

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