Following a powerful rally in semiconductor stocks, there are signs that hedge fund clients are taking profits on their investments in the sector even as technology companies climb to fresh record highs, according to Goldman Sachs Global Banking & Markets.

The profit taking on companies making semiconductors and related equipment—part of the underpinnings of the boom in artificial intelligence (AI) infrastructure—likely reflects risk and portfolio rebalancing by certain types of hedge funds, says Vincent Lin, co-head of Prime Insights and Analytics.

“In the middle of this substantial price rally in the group, hedge funds have not been chasing,” Lin says. “They’ve been selling down their exposure in the sector. It is a reflection of hedge funds taking profits, taking some chips off the table.”

The subsector for semiconductors and related equipment is the most net-sold US subsector in the past month and now modestly net sold on the year, according to Prime Insights and Analytics. But despite recent signs of profit taking, hedge fund exposure to this subsector remains high: Since the start of last year, semiconductor and chip-maker equipment companies are still among the most net-bought (cumulative) US subsectors.

As chip stocks rally, semiconductor investments have mechanically increased as a share of portfolios for some managers. From a risk-management perspective, certain funds will need to sell semiconductor stocks to manage their exposure to the sector, Lin says.

Are hedge funds buying semiconductor stocks?

“We don’t think this is a regime shift from a fundamental perspective of hedge funds moving away from the AI theme,” Lin adds. “Obviously, semis have been the center of gravity when it comes to the AI infrastructure theme. Hedge funds have been embracing that theme and gaining a lot of exposure through this period.”

Semiconductor stock prices have climbed substantially since mid-April. That may partly reflect growing enthusiasm for the sector from retail investors, Lin says. He points out that asset managers that are benchmarked to an index have also been buying the stock category.

Are hedge funds bullish on stocks?

There are signs that funds have been hedging their portfolios in recent weeks amid record high stock prices, ongoing tensions in the Middle East, and economic data showing elevated inflation, Lin says. Benchmark Brent oil is trading above $100 per barrel, and bond yields spiked in May.

“These factors are weighing on equity sentiment broadly speaking,” Lin says. 

As investment managers hedge their portfolios, hedge fund short exposure (bets that an asset price will fall) to US index and exchange-traded fund (ETF) macro products is rising, Lin says. Short exposure to these instruments has climbed above the levels before the ceasefire between Iran and the US and Israel and is at a 10-year high.

“We have seen hedge funds moving quickly to raise short exposure in macro products again, which is an indication of the appetite to hedge their exposure to the overall market,” Lin says. “Especially with the market at all-time highs, mostly because of AI—because other sectors have struggled, relatively speaking—people have been moving quickly when the macro picture becomes trickier.”

That isn’t to suggest that hedge funds aren’t active. In a signal that hedge funds are deploying capital, gross leverage has risen to new record highs for Goldman Sachs Prime Services clients. By contrast net leverage exposure, which shows the directional bias for hedge fund clients, has been relatively flat.

“The reason is that managers are taking profits from one of the hottest areas of the market. They are also hedging using macro products,” Lin says. “It points to some restraint by hedge funds—it doesn’t point to euphoria. That’s in contrast to some of the price action you’re seeing in the marketplace.”

This article is being provided for educational purposes only. The information contained in this article does not constitute a recommendation from any Goldman Sachs entity to the recipient, and Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.