Hedge funds net best month in 24 years on AI chip rally

Hedge funds focused on stock selection gained an average of 6.5% in April, marking the industry's best monthly performance since December 1999, according to data from research firm PivotalPath. The returns were fueled by a massive rally in semiconductor companies and the broader AI hardware supply chain, with tech-focused funds soaring 10.3% for their best month in 28 years.

"In addition to AI being the most compute intensive thing we’ve ever seen and shortages as far as the eye can see, we’re in a golden age of hardware," Alex Sacerdote, head of Whale Rock Capital Management, said at the Sohn Investment Conference. "All of these companies that nobody used to ever pay attention to are now golden, wonderful businesses."

The performance highlights a high-conviction bet on the AI infrastructure buildout. Hedge funds have increased their net allocation to semiconductor stocks from 5.5% to 20% of their portfolios over the past year, according to Morgan Stanley. That exposure paid off handsomely in April, with firms like Steve Cohen’s Point72 gaining 4.5% in its flagship fund, while its dedicated AI fund, Turion, jumped 15%. The Seligman Tech Spectrum fund posted a nearly 20% gain, its best since 2001, driven by top holdings in Broadcom, Applied Materials, and Lam Research.

This year’s surge is underwritten by unprecedented capital spending from technology giants. Microsoft, Alphabet, Meta Platforms, and Amazon.com have collectively planned $670 billion in spending, much of it directed at data centers packed with advanced chips from companies like Nvidia, AMD, and Micron. This ravenous demand is reshaping the semiconductor industry, which has historically been notoriously cyclical. While analysts have often warned of boom-and-bust cycles, the current AI-driven demand appears to be a multi-year structural shift, overpowering macroeconomic headwinds like higher inflation and geopolitical tension.

Sector Strength Creates Market-Wide Risk

The outperformance is so strong that it has made the broader market increasingly dependent on the high-flying group. The 19 semiconductor and related equipment stocks in the S&P 500 now account for 18% of the index's total weight, according to Reuters. Gains in these stocks, along with memory and storage specialists like Sandisk and Western Digital, contributed to 70% of the S&P 500's $5.1 trillion market capitalization increase this year, per JonesTrading data.

This concentration, however, is flashing warning signs for some investors. Even as the S&P 500 reached all-time highs, barely half of its constituent stocks were trading above their 50-day moving averages, a sign of weak market breadth. Furthermore, the Philadelphia SE Semiconductor index (.SOX) recently hit its most "overbought" level on a weekly basis since the dot-com peak in March 2000, according to its relative strength index.

"Anytime you see parabolic moves in anything, you have to ask yourself, are things getting too ebullient here?" said Peter Tuz, president of Chase Investment Counsel.

Some are taking action on that concern. High-profile investor Michael Burry disclosed he holds bearish put options on the iShares Semiconductor ETF (SOXX), betting on a pullback. Still, the fundamental picture remains robust. Worldwide semiconductor revenue is projected to climb 64% to $1.3 trillion this year, according to Gartner, as the AI buildout continues to accelerate.

This article is for informational purposes only and does not constitute investment advice.