Investors Revive Dotcom-Era Strategy for AI Risks

Fund managers shift from overvalued AI stocks to overlooked sectors, aiming to stay in the rally with less exposure.

As AI stocks surge and valuations reach historic highs, professional investors are turning to a strategy reminiscent of the late 1990s dotcom boom. Rather than betting against the AI trend, asset managers are rotating out of heavily hyped stocks like Nvidia and into adjacent sectors with untapped growth potential. This approach helped hedge funds avoid the worst of the dotcom crash while still profiting from the broader tech rally. Today’s market, marked by record-breaking U.S. stock performance, is prompting similar caution.

Seeking Growth Beyond the AI Leaders

Investors are increasingly wary of the concentration in Wall Street’s “Magnificent Seven,” especially after Nvidia’s valuation surpassed $4 trillion. Francesco Sandrini of Amundi noted signs of speculative excess, such as aggressive options trading tied to major AI stocks. His firm is now focusing on software companies, robotics, and Asian tech firms that have yet to fully benefit from the AI wave. The goal is to identify high-growth opportunities overlooked by mainstream investors.

Simon Edelsten of Goshawk Asset Management compared the current environment to 1999, when telecom IPOs and internet stocks dominated headlines. He favors IT consultants and Japanese robotics firms that could benefit from AI infrastructure spending. This mirrors the historical pattern of investing in suppliers during a market gold rush. Rather than chasing peak valuations, investors are looking for companies that support AI development without being directly exposed to its volatility.

Hedging Against Overcapacity and Market Saturation

The rapid expansion of AI data centers by hyperscalers like Amazon, Microsoft and Alphabet has raised concerns about overcapacity. Becky Qin of Fidelity International sees uranium as a strategic AI play, citing the energy demands of AI infrastructure. Kevin Thozet of Carmignac is shifting capital into Taiwan’s Gudeng Precision, which supplies packaging for AI chips. These moves reflect a broader effort to benefit from AI indirectly, while avoiding the risks of overexposure.

Asset managers are also drawing parallels to the fiber-optic boom of the early 2000s, which led to oversupply and market corrections. Arun Sai of Pictet Asset Management warned that excesses are inevitable in any new technology cycle. He is using Chinese equities as a hedge, anticipating that rapid AI progress in China could dampen enthusiasm for U.S. tech stocks. Others, like Oliver Blackbourn of Janus Henderson, are diversifying into European and healthcare assets to buffer against a potential AI-driven downturn.

Timing the Bubble Without Calling the Peak

Historical research by economists Markus Brunnermeier and Stefan Nagel found that hedge funds during the dotcom era avoided shorting the bubble but timed their exits effectively. By rotating profits into lesser-known stocks before retail investors caught on, they outperformed the market and sidestepped the crash. Today’s fund managers are attempting a similar maneuver, staying invested in AI while reducing exposure to its most inflated components. The challenge lies in identifying the next wave of beneficiaries before momentum shifts.

Blackbourn cautioned that predicting the end of the AI boom is nearly impossible in real time. He likened the current phase to 1999, where optimism persisted until the bubble burst. Investors are therefore balancing participation with protection, aiming to capture gains without being caught in a reversal. This strategy reflects a pragmatic response to a market driven by innovation, speculation and uncertainty.