Last week was rough for anyone holding AI stocks. For the week ending Nov. 6, the information technology sector fell 8.2%, and the Russell 1000 Growth index dropped 4.8%, according to LPL Research.
Hedge funds were among the biggest sellers. And the way they sold says a lot about whether regular investors should follow.
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The Pros Are Pulling Back
In a note on Wednesday, LPL analyst Michael McClain wrote that hedge funds are now underweight the broad AI trade for the first time since early 2023, citing trading data from Goldman Sachs and Morgan Stanley.
The pullback didn’t start last week. Hedge funds’ gross exposure, the total value of their bets for and against stocks, has fallen about 8% from its June peak. LPL calls it the largest sustained stretch of long/short stock de-risking in more than 15 years.
Selling Isn’t the Same as Betting Against
Hedge funds sold stocks they already owned roughly 3.5 times faster than they opened new short positions, which are bets that a stock will fall.
In other words, most managers weren’t predicting a crash. They were cutting risk. “That pattern indicates liquidation rather than a broad expression of a negative fundamental view,” LPL wrote.
Crowding made it worse. AI stocks had become among the most widely held names by both hedge funds and traditional funds. When everyone owns the same stocks and decides to lighten up at once, prices can fall fast, regardless of how the underlying businesses are doing.
The Rebound Test
On Wednesday, AI stocks bounced hard after CoreWeave (NASDAQ:CRWV) reported strong results and raised its revenue forecast. CoreWeave jumped 25%, Dell Technologies (NYSE:DELL) rose 12%, Oracle (NYSE:ORCL) rose 9%, and the Invesco QQQ Trust (NASDAQ:QQQ), which tracks the Nasdaq-100, gained 2.3%.
But LPL warns that not every rally is what it appears to be. Some of the recent buying has come from hedge funds covering short positions, or buying back stocks they had bet against. That can drive prices up quickly, but it “may fade if fundamental investors do not participate,” LPL wrote.
LPL suggests watching two things. First, whether hedge funds’ exposure continues to shrink. Second, whether the rally broadens beyond a handful of AI leaders. A slow rebuild with wider participation would be healthier than a rush back into the same crowded names.
