AI Trade’s Breadth Buoys Strategies That ‘Calibrate’ Exposure

Alternatives haven’t been this relevant since the ’90s grunge scene.

Equity concentration is at historically high levels. With SpaceX’s June listing, the 10 largest companies now account for about 35% of Morningstar’s Total Market Index, and Goldman Sachs’ research that artificial intelligence spending will make up about 40% of this year’s S&P 500 earnings growth comes as no surprise. That has some investors turning to alts to diversify away from equities. 

“The scale of the AI theme is so big and so powerful, and its tentacles stretch into so many different things, that watching out for your exposure to AI is a key part of risk management,” said David Stubbs, chief investment strategist at AlphaCore Wealth Advisory. If clients are determined to stay liquid, it is, of course, possible to get away from AI by allocating to sectors, factors or countries in equities that don’t have AI exposure, “but without utilizing alternatives, you’re trying to climb the ladder with one hand tied behind your back.”  

Alpha Bet Soup

One area that Shang Chou, cofounder of Dishmi Capital, is looking at for diversification is managed futures, which can provide a consistent positive absolute return. “In the case of really sharp equity market selloffs — think 2008, 2009, 2022 — these strategies actually really performed well, and they give you the so-called ‘crisis alpha,’” he said. “Most individual, taxable investors are totally underallocated to this strategy.” 

Other suggestions include: 

• Early-stage venture capital across themes that are only at the fringes of AI, like consumer, defense and biotech. Evergreen vehicles can provide more transparency than traditional capital call structures, Stubbs said. 
• Manufacturing has been a trend, given the current presidential administration’s priorities. Lower middle-market private equity for companies building physical things is a way to play this theme, and it tends to have cheaper valuations and more options for finding liquidity, like selling up the private equity food chain, said Matt Malone, head of investment management at Opto Investments. 

Don’t Throw the Bot Out With the Bathwater. All this said, AI is still a growth driver. “What we’re seeing from a lot of clients is not necessarily that they’re trying to diversify away from AI, it’s that they’re trying to get exposure to AI in a different way,” Malone said. These clients are looking to get into fast-growing, private companies that may be bought out by Anthropic or OpenAI or contributing to the AI infrastructure buildout. 

It’s all about balance, Stubbs said. “People often jump from, ‘I’ve got lots of exposure to AI’ to ‘I don’t want any exposure to AI’ and they miss the middle ground, which is, ‘Can you calibrate and diversify your exposure to AI?’”