Hedge funds have moved underweight the broader AI trade for the first time since early 2023, according to Morgan Stanley prime brokerage data, as combined summer and October position cuts created what the bank called “the largest sustained stretch of L/S fund de-risking in over 15 years, as gross exposure never fully recovered between episodes.” Cumulative gross flow is down 8% from its June peak, though short covering accounted for the bulk of the week’s buying, lifting US long/short net leverage by 5 percentage points to 51% while gross leverage slipped 1 point to 207%.
Goldman Sachs data shows hedge funds sold AI stocks for five straight sessions from Oct 8 to Oct 14, wiping out all of their AI buying since the start of 2025, and liquidated long positions roughly 3.5 times faster than they added new shorts. From Oct 6 through Oct 30, 47 AI and semiconductor stocks lost about $5 trillion in market value while 625 other large US stocks gained $1.3 trillion, and Morgan Stanley’s AI stock basket fell 18% in October against a 2% gain for the average US stock.
The rotation out of capital-intensive AI builders has left Apple as the only Magnificent Seven stock outperforming the S&P 500 this year, up 28% year to date after largely avoiding the AI capital spending binge draining free cash flow at its hyperscaler peers. Apple closed Friday at a $5.03 trillion market capitalization to overtake Nvidia at $4.94 trillion as the world’s most valuable company, reversing a $903 billion lead Nvidia held on Oct 6.