Short sellers who have been dormant for three years are reawakening. As artificial intelligence fervor drives stock markets to dizzying heights, skeptical investors are actively seeking profitable strategies to hedge against what they perceive as an inevitable market correction.
According to reports, traders are betting that massive AI investments by tech giants will fail to yield proportional returns. From shorting chip manufacturers and tech company debt to over-the-counter wagers against private startups, Wall Street is exploring every possible method to hedge against potential risks from AI mania.
This strategic shift reflects growing market anxiety about the ultimate outcome of AI infrastructure development. Investors are beginning to worry that tech giants may never generate sufficient profits to justify their enormous AI spending commitments and elevated valuations.
However, hedging these risks presents significant challenges. Given that AI-related stocks are highly susceptible to sharp rallies on positive news, direct short positions face substantial squeeze risks. This has forced short sellers to seek relatively safer targets in bond markets and derivative instruments.
**Avoiding Equity Exposure, Targeting Corporate Debt**
As tech giants pour unprecedented resources into AI, shorting corporate debt has emerged as a more stable hedging approach. Companies including Amazon and Alphabet are projected to invest $670 billion in AI infrastructure this year alone, raising concerns about cash flow sustainability.
JonesTrading's chief market strategist Michael O'Rourke observed: "Investors now prefer shorting hyperscale cloud providers because they're sacrificing their free cash flow. This represents a significant shift and a major risk."
Bank of America strategist Michael Hartnett has begun advising clients to short bonds of giants including Oracle, Meta Platforms, and Microsoft. Some traders favor targeting AI-related debt because these markets have fewer retail investors, reducing the likelihood of meme-stock style rallies that could squeeze short positions.
**Multiple Fronts: From Oracle to Supply Chain**
In direct equity shorting, Oracle has become a primary target. FactSet data shows that over 2% of Oracle's shares were sold short as of January 30, up from approximately 1.5% a year earlier. This reflects market concerns about the company's plans to raise up to $50 billion this year for AI infrastructure development.
Oracle's $300 billion computing power sales agreement with OpenAI has also made it an alternative short target. "Shorting Oracle is effectively shorting OpenAI," Michael O'Rourke noted.
Meanwhile, some investors are establishing short positions against derivative companies in the AI supply chain. Prominent short seller Jim Chanos recently targeted renewable energy company Ormat Technologies, which recently agreed to supply geothermal power for Google's expanding operations in Nevada. Chanos told clients the company will likely lose money on the deal due to high costs.
Short interest is also emerging against AI chip leader Nvidia. Stanphyl Capital Partners hedge fund manager Mark Spiegel previously shorted Nvidia shares, anticipating chip sales would slow as investors grow concerned about massive capital expenditures. Although he recently closed the position at a slight loss, he indicated readiness to reestablish short exposure.
**Over-the-Counter Bets and Historical Parallels**
For privately-held AI core companies, investors are even engaging in legal contracts for private wagers. OpenAI reached an $830 billion valuation in its latest funding round and is expected to go public later this year. QVR Advisors portfolio manager Benn Eifert has entered private contracts with technology professionals betting on OpenAI's ultimate valuation trajectory. If OpenAI's valuation exceeds $300 billion one year after its IPO, Eifert stands to lose millions; if below that figure, he profits.
This pessimism isn't isolated. Noted short seller Michael Burry, who successfully predicted the subprime crisis, recently compared the AI frenzy to the early internet bubble.
However, channels for establishing large-scale bearish positions remain limited. Following substantial losses during the 2008 housing crisis, banks have become extremely cautious about serving as counterparties for major short bets. It was through shorting high-risk mortgages that John Paulson earned $15 billion during that period.
Additionally, extreme volatility in AI stocks has deterred many institutions. Cresset Capital chief investment strategist Jack Ablin acknowledged: "I don't have the stomach for it. I'm not prepared to handle stocks that could surge dramatically on positive news right before my eyes."
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