AI "acrophobia" spreads: Global investors are searching for all means to hedge against three years of AI frenzy

The AI short sellers who have been dormant for three years are waking up. As the artificial intelligence frenzy pushes the stock market to dizzying heights, skeptical investors are actively seeking ways to profit in response to what they see as an inevitable market washout.

According to The Wall Street Journal, traders are betting that the massive AI investments by tech giants will not yield commensurate returns. From shorting chip manufacturers and the debts of tech giants to engaging in over-the-counter bets on unlisted startups, Wall Street is exploring every possible means to hedge against the potential risks brought by the AI frenzy.

This shift in strategy reflects the growing anxiety in the market about the ultimate outcome of AI infrastructure development. Investors are beginning to worry that tech giants may never achieve sufficient profits to support their massive AI spending commitments and extremely high valuation levels.

However, the paths to hedge these risks are facing challenges. Given that AI concept stocks can easily surge on positive news, directly shorting stocks carries a significant risk of being squeezed, forcing short-selling institutions to turn to the bond market and derivatives for relatively safer targets.

Avoiding the Spotlight of Stocks, Targeting Giant Debts

In the face of tech giants' reckless spending, shorting corporate debt is becoming a more prudent hedging path. Companies like Amazon and Alphabet are expected to invest up to $670 billion this year in AI infrastructure, raising concerns about cash flow in the market.

Michael O’Rourke, Chief Market Strategist at JonesTrading, pointed out :

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

Bank of America strategist Michael Hartnett has begun urging clients to short Oracle, as well as the bonds of giants like Meta Platforms and Microsoft. Some traders prefer targeting AI-related debts because the retail investor presence in that market is relatively low, helping to prevent a surge similar to "meme stocks," thereby protecting short positions from being squeezed.

Multiple Approaches: From Oracle to Supply Chain

In terms of directly shorting stocks, Oracle has become one of the core targets for short sellers. According to FactSet data, as of January 30, over 2% of Oracle's shares were shorted, up from about 1.5% a year ago. This reflects market concerns about the company's plans to raise up to $50 billion this year to build AI infrastructure.

The $300 billion computing power sales agreement between Oracle and OpenAI also makes it an alternative target for short sellers. “Shorting Oracle is like shorting OpenAI,” Michael O’Rourke stated.

Meanwhile, some investors are starting to establish short positions on derivative companies in the AI supply chain. Notable short seller Jim Chanos recently shorted renewable energy company Ormat Technologies. The company recently reached an agreement with Google to provide geothermal power for its expanding operations in Nevada. Jim Chanos informed clients that, given the high costs, the company is very likely to incur losses on this deal Short selling against AI chip leader Nvidia has begun to emerge. Mark Spiegel, the hedge fund manager at Stanphyl Capital Partners, previously shorted Nvidia's stock, expecting that chip sales will slow down as investors' concerns about the giant's massive capital expenditures intensify. Although he recently closed his position with a slight loss, he stated that he is preparing to re-establish a short position.

Private Bets and Historical Shadows

For unlisted AI core companies, investors are even engaging in private bets through legal contracts. OpenAI's valuation reached $830 billion in its recent funding round, and it is expected to go public later this year. Benn Eifert, a fund manager at QVR Advisors, has signed private contracts with tech professionals to bet on the future valuation of OpenAI. If OpenAI's valuation exceeds $300 billion one year after its IPO, Benn Eifert will lose millions of dollars; if it falls below that number, he will profit.

This pessimistic sentiment is not an isolated case. The well-known short seller Michael Burry, who successfully predicted the subprime mortgage crisis, has recently compared the current AI frenzy to the early internet bubble.

However, the channels for establishing large-scale bearish positions remain limited. After suffering massive losses during the 2008 real estate crisis, banks have become extremely cautious about acting as counterparties for large bearish bets. That year, John Paulson profited $15 billion by shorting high-risk mortgages.

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 that. I'm not ready to deal with stocks that can skyrocket right in front of me because of a piece of good news.”