Institutional investors hedge bets as AI market risks grow amid soaring valuations

Institutional investors are adjusting their strategies to stay in the AI market while guarding against potential risks. Unlike the dot-com crash, major players continue to back AI despite growing concerns over valuations and speculative trading. The sector remains a core part of long-term portfolios, but hedging tactics are now more common.

Over the past three years, AI-focused stocks like Nvidia (NVDA) and AMD (AMD) have delivered massive returns. Nvidia's share price climbed over 800% due to soaring demand for AI chips, while AMD saw a 250% rise from data centre GPU sales. These gains reflect the broader AI buildout, which has become central to many investment strategies.

Yet analysts warn of risks ahead. JPMorgan's Susan Bao highlights potential issues such as overvaluation, slower growth after the 2025 hype cycle, and supply chain disruptions. Competition from custom chips by tech giants like Google and Amazon could also pressure traditional AI hardware firms.

Despite these concerns, Bao argues that today's AI expansion differs from the late '90s dot-com bubble. Current challenges—like power shortages, data centre construction delays, and a shortage of skilled labour—are real but not necessarily signs of a speculative crash. Still, the market shows signs of 'irrational exuberance,' with high retail investor participation reminiscent of the late '90s.

In response, institutional investors are using derivatives and hedging techniques. Their goal is to maintain AI exposure while protecting against sharp downturns. This cautious approach contrasts with the all-in bets seen during the dot-com era.

The AI sector remains a key focus for investors, but strategies are shifting to balance opportunity with risk. Hedging and selective trades now play a bigger role as firms prepare for possible volatility. While comparisons to past bubbles persist, the current buildout faces distinct operational and competitive hurdles.