AI investment frenzy unwinds, leaving hedge funds reeling

Multi-strategy hedge funds, typically valued for their ability to generate profits during market downturns, also suffered significant losses, with Millennium reporting a 2.3% decline in October and holding a substantial number of Nvidia shares (12,157,614). AI-focused funds, like Vara, experienced even steeper losses, dropping 33% in October despite remaining positive for the year, illustrating the magnitude of gains that preceded the recent reversal.

Market strategist Michael Ball at Bloomberg News attributed the initial downturn to a “sucker punch” driven by short covering and dealer hedging, suggesting the AI trade had become excessively large. He characterized the recent market activity as “mechanical” rather than reflecting a fundamental shift in the AI narrative.

Concerns surrounding Nvidia’s governance also contributed to the market’s anxieties. Jim Cramer, on Mad Money, raised questions about a reported relationship between CEO Jensen Huang and a woman alleged to be a Chinese spy, prompting speculation about a potential future without Huang at the helm. Cramer emphasized the importance of preserving the institution, even if Huang were to depart.

Beyond governance, a shift in the capital expenditure (Capex) narrative has emerged, with investors now focusing on financing, free cash flow, and challenges related to infrastructure and electricity supply. Post-election concerns regarding the 2028 project pipeline have further amplified these concerns.

Despite the recent volatility, Nvidia’s financial results remain strong. The company reported revenue of $96.221 billion in Q2 fiscal 2027, a 105.8% increase year-over-year, with Data Center revenue surging to $89.023 billion. However, demand continues to outstrip supply, with CEO Huang stating that demand is significantly higher than the roughly 70% growth that supply can support.

The current situation appears to be a combination of a market positioning unwind and concerns surrounding Nvidia’s leadership. The stock currently trades at about 23 times trailing earnings. Investors will be closely watching Nvidia’s upcoming earnings report on November 17, particularly the trend in compute demand, to determine whether the recent downturn is a temporary correction or a sign of a broader shift in the AI landscape.