Hedge funds were already hitting the brakes on their US artificial intelligence (AI) investments as China’s DeepSeek, a rising AI model, began to disrupt America’s dominance in the sector, according to a report by Reuters.
The growing popularity of DeepSeek and its open source AI models has rattled investor confidence in the profitability of US AI offerings, leading to a sell-off in tech stocks and a slump in Nasdaq futures.
The report cites a recent note from Goldman Sachs’ prime brokerage desk, tracking trading flows from 17-24 January, as revealing that hedge funds significantly reduced their exposure to tech stocks, and highlighted a notable retreat from US tech and adjacent sectors, including infrastructure companies that support AI development. These include power and energy firms that would benefit from advancements in AI, such as those powering data centres or building electric vehicle charging stations.
This cautious stance is nothing new though. Over the past 12 months, hedge funds have been hesitant to re-enter the tech sector with conviction after a massive sell-off between June and August of last year. According to Goldman Sachs, trade flows indicate that hedge funds have been more inclined to sell these stocks, many of which stand to gain from a US-led AI boom.
Despite the broader retreat, a smaller subset of hedge funds has maintained its positions, currently holding the highest number of long positions in two years, according to Goldman’s research.
The US tech sector has seen massive investments in AI infrastructure, driven by the success of OpenAI’s ChatGPT. Notably, OpenAI and Japanese conglomerate SoftBank recently committed $19bn each to fund Stargate, a joint venture aimed at developing advanced AI data centres in the US.
Though, according to Bruno Schneller, Managing Director at Erlen Capital Management, a firm that specialises in hedge fund investment, managers appear to be adopting a “wait-and-see” approach toward US AI-related stocks, citing regulatory uncertainties and the complexities of large-scale projects like Stargate.
“Competition from global players like the Chinese AI startup DeepSeek has raised questions about the sustainability of US dominance in this sector, despite substantial domestic investments,” said Schneller. “Large-scale projects like the Stargate AI initiative bring regulatory complexities that are still unfolding. The lack of clarity surrounding the execution and enforcement of these policies keeps many investors on edge.”
