Hedge funds may be approaching the end of a sharp de-risking cycle in momentum and semiconductor stocks, potentially creating an opportunity to rebuild positions in artificial intelligence-related equities, according to a report by Bloomberg citing a note from UBS.
The bank’s trading desk said investors should consider gradually adding exposure to beaten-down AI and chip stocks as speculative positioning has been substantially reduced and fundamentals in the sector remain supportive.
The call came as Asian semiconductor stocks rebounded sharply on Tuesday. A gauge tracking the region’s chipmakers rose more than 3%, while technology-heavy benchmarks in South Korea and Taiwan also gained more than 3% as investors returned to stocks that had recently suffered heavy losses.
UBS prime brokerage data show hedge funds have reduced long exposure to momentum and semiconductor stocks by approximately 5% of gross market value — one of the largest such reductions on record. Net positioning in semiconductor and software stocks has consequently fallen back to levels last seen in April.
“Improving AI fundamentals are a signal to buy the dip,” Michael Romano, head of hedge fund equity derivative sales at UBS, said in a note to clients, while advising investors to scale into positions rather than attempt to re-enter the market in a single move.
“The momentum de-risk was and remains a conviction call,” Romano wrote. “Scaling into a position is prudent.”
UBS’s momentum basket includes companies such as Sandisk, Broadcom, Oracle, KKR, Datadog and Microsoft.
The sharp reduction in hedge fund exposure could help create the conditions for a rebound if investors begin to rebuild positions. Romano said positioning had become increasingly supportive of a recovery in momentum stocks, although any rotation back into AI could come at the expense of sectors that have recently outperformed.
UBS prime brokerage data suggest that much of the recent buying in banks, industrial companies and other cyclical sectors was driven by short covering rather than the establishment of new long positions. That could leave those sectors vulnerable if investors rotate back towards technology and AI-related equities.
The bank’s software basket has already gained roughly 20% since the end of June, highlighting the extent to which positioning continues to drive performance across the sector.
Romano expects the momentum unwind to reach a trough by the end of July, if it has not already done so. A sharp reversal in UBS’s momentum indicator on Friday provided further evidence that selling pressure may be easing, with the gauge moving from a 3.5% decline to a 2.5% gain in just two hours.
“I’d expect a liquidity bubble to the upside when things turn,” Romano wrote.
For hedge funds, the potential end of the momentum unwind could mark a key inflection point. After one of the most aggressive reductions in AI and semiconductor exposure on record, even a modest return of risk appetite could generate significant buying pressure in a crowded but substantially less heavily positioned trade.
