Hedge Funds Scale Back US AI Investments as China’s DeepSeek Challenges Dominance

Hedge funds have begun to reduce their investments in US artificial intelligence (AI) as DeepSeek, a rising AI model from China, starts to challenge America's dominance in the sector, according to a Reuters report.

The rapid rise of DeepSeek and its open-source AI models has shaken investor confidence in the profitability of US AI ventures, leading to a decline in tech stock prices and a drop in Nasdaq futures.

The report cites a recent update from Goldman Sachs’ prime brokerage team, which tracked trading activity between 17 and 24 January. It revealed that hedge funds have significantly scaled back their exposure to tech stocks, with a particular retreat from US technology and related industries, such as infrastructure companies that support AI development. These include power and energy firms benefiting from AI advancements, such as those operating data centres or constructing electric vehicle charging stations.

This cautious stance from hedge funds isn’t a new phenomenon. Over the past year, hedge funds have been hesitant to re-enter the tech sector with confidence following a massive sell-off between June and August of the previous year. According to Goldman Sachs, trade flows suggest that hedge funds have preferred to offload stocks in the tech space, many of which stand to profit from a US-led AI boom. Despite the general pullback, a smaller group of hedge funds has continued to maintain their positions, holding the highest number of long positions in the past two years, according to Goldman’s analysis.

The US tech sector has seen massive investments in AI infrastructure, particularly following the success of OpenAI’s ChatGPT. OpenAI and Japanese conglomerate SoftBank have each pledged £19 billion to fund Stargate, a joint venture focused on creating advanced AI data centres in the US, highlighting the sector’s potential.

However, Bruno Schneller, Managing Director at Erlen Capital Management, a firm specialising in hedge fund investments, notes that many hedge fund managers are adopting a "wait-and-see" approach towards US AI stocks. He points to the regulatory uncertainties and the complexities surrounding large-scale projects like Stargate as key issues contributing to this cautious outlook.

“Competition from global players such as the Chinese AI startup DeepSeek has cast doubt on the sustainability of US dominance in this sector, despite substantial investments made domestically,” Schneller said. “Large-scale projects like Stargate face ongoing regulatory challenges, and the uncertainty regarding the execution and enforcement of these policies is making many investors cautious and reluctant to commit significant capital.”

Schneller’s comments reflect growing concerns that the rapid pace of AI advancements in China, coupled with regulatory hurdles in the US, could reshape the global AI landscape.