How are AI hedgies finding the next Nvidia and what are they betting big on?
While not every company can be golden child Nvidia – which just booted Alphabet to become Wall Street’s third most valuable company – some are doing a better job of attracting investor attention than others.
So where are hedgies looking to place their artificial intelligence (AI) related bets?
Xuesong Zhao is the lead manager of Polar Capital’s $448m (£357m) AI Fund, launched in 2017 when the London-based fund management boutique saw an opportunity to harvest the fruits of what it believes will be the next general purpose technology.
Speaking to CityAM, Zhao said the AI fund is not designed to be a “high octane product” but more like a global growth or disruption fund.
“Whenever new tech comes to the market we believe the bigger opportunity actually comes from the so-called hidden market. That’s the reason we launched the AI fund in a global equity format; so that we can invest in beneficiaries outside the tech sector,” he explained.
Zhao compared the AI boom to the internet era, when people realised it was the new business model being built on the internet that offered the biggest opportunity, such as e-commerce and online advertising – two areas initially considered outside of tech.
Polar Capital did buy Google and Amazon before they became the giants they are today but only as one or two per cent of the fund. A dedicated fund could have bought them as three or five per cent.
“Learning what happened previously, we believe this round will be the same. If we can identify the beneficiaries …the return could be quite attractive,” Zhao said.
Zhao said beneficiaries need to have a strong data set, a flexible structure and must be doing something unique in their sector with good potential for monetisation. Although there are currently few clear winners of AI, he reckons the second half of 2024 may be more revealing.
That is of course easier said than done, especially when every company is tripping over itself to tell investors its AI playbook, something Zhao said is a big problem right now. “You can’t afford not to talk about AI…, so everyone claims they are doing some kind of AI in their business model.”
The most important factor for Polar Capital is the kind of AI companies are using. Generative AI, for example, is “very interesting” when used to do something new. But large language models are costly and Zhao warned this needs to be reflected on the cost side of things.
Companies also need to make sure they are using AI to monetise and drive up their customer base instead of just passively defending their existing market share.
Since its launch, Polar Capital’s AI fund has seen a 103.35 per cent cumulative growth over the past five years and 28.55 per cent growth in the past calendar year.
Launched one month before Polar Capital’s AI fund, the £915m WS Blue Whale Growth fund also has Nvidia and Microsoft as its top two holdings.
Manager of the fund Stephen Yiu told CityAM that he remains extremely bullish on Nvidia and does not think the share is overpriced today.
Nvidia is a “pioneering AI capability”, he said, “without Nvidia’s GPU, there is no AI.”
Blue Whale Growth fund has the biggest percentage investment in Nvidia in the entire UK funds market, according to Yiu, with a current weighting of around 9.2 per cent. By comparison, the chip giant is weighted at about 5.2 per cent in Polar Capital’s AI fund.
Yiu said the Blue Whale Growth fund only owns a couple of companies exposed to AI because “the reality is that not many companies are actually benefiting from AI or creating AI.”
Aside from Nvidia and Lam Research – a global supplier of the equipment needed to make microchips – Yiu is looking at the companies creating applications which other companies or individuals can use to increase productivity and efficiency. Two of these, which are in Blue Whale Growth fund, are Microsoft and Adobe.
Meanwhile, a new addition to the fund is Meta, which it had previously held a position in but ditched in January 2022- a timely move before the shares took a wobble.
But last year Yiu revisited Meta and decided the concerns were gone. The owner of Facebook, Instagram and Whatsapp has insane amounts of data on consumers, with an average of three billion daily users across the three apps.
“We are going into an era of personalised advertisement,” Yiu said, “and Meta is going to be the most effective medium to deliver those creative projects because there’s no point just creating all these campaigns without a way to deliver them.”
According to Dataroma – a tracker of some of the world’s largest hedge funds – Alphabet, Microsoft and Amazon were the top bought stocks in the fourth quarter of 2023. Apple was sixth highest but Meta failed to make the top 10.
Yiu is more wary of software companies using generative AI in chatbots, to improve customer service or enhancing the user experience in various ways. “That’s not really game changing,” he said, “They will get some benefit but I would say that’s probably a bit overhyped.”
Over the past five years, Blue Whale Growth fund has risen by 82.46 per cent, with 29.72 per cent growth in the past calendar year.