Top investors warn on AI wake-up call

One scoop to start: The Trump administration’s embrace of cryptocurrencies is helping fuel a speculative mania that could cause “havoc” when prices collapse, hedge fund manager Elliott Management has warned.

In today’s newsletter:

• DeepSeek’s “wake-up call” to AI investors

• The short sellers who remain after Hindenburg’s exit

• European stocks on track to outpace global rivals in January

Top investors warn on AI wake-up call

The start of the Global Alts conference in Miami last week coincided with a ferocious sell-off in US tech stocks. 

A little-known Chinese company, DeepSeek, sent shockwaves through the world of artificial intelligence when it unveiled a cutting-edge reasoning model capable of competing with those designed in the US — but apparently for a fraction of the cost. 

By the end of Monday, chipmaker and stock market darling Nvidia had shed almost $600bn — the biggest one-day loss in US history. The sell-off spread to energy stocks and utilities that had been expected to benefit from demand for power to fuel AI data centres. 

As hedge fund heavyweights gathered in the Florida sunshine, some of the world’s top investors tried to make sense of it all.

The hit to shares of asset managers and other companies caught up in Nvidia’s rout on Monday shows “the irrationality of markets”, Howard Marks, co-founder of $205bn debt investing powerhouse Oaktree Capital, told the conference on Tuesday. 

It was unusual that the AI-driven sell-off also hit a wide group of other companies, including Oaktree’s majority owner Brookfield Asset Management, and competitors such as Apollo Global, KKR and Blackstone. 

“If it were just objective, clinical, unemotional investors looking at Nvidia there would be no reason why yesterday’s news should knock all these other things down,” said Marks. “It just shows the pervasiveness of psychology and the irrationality of the markets in the short-run.” 

Meanwhile Ray Dalio, founder of hedge fund Bridgewater Associates, was among those to voice concern that the boom in US AI stocks has gone too far. 

Investor exuberance over AI has fuelled a “bubble” in US stocks that resembles the build-up to the dotcom bust at the turn of the millennium, he said.

Dalio told the Financial Times that “pricing has got to levels which are high at the same time as there’s an interest rate risk, and that combination could prick the bubble”. 

“Where we are in the cycle right now is very similar to where we were between 1998 or 1999,” Dalio said. “There’s a major new technology that certainly will change the world and be successful. But some people are confusing that with the investments being successful.”

Steve Cohen, founder of hedge fund Point72, which recently launched a new strategy that focuses on trading AI assets, blamed the tumble in tech shares on misinformation — and said that the rapid emergence of DeepSeek is “bullish” for the sector. 

Why? “It advances the move to artificial super intelligence, and that’s coming and it’s coming quick,” he told the Miami conference, referring to AI models that may one day have better cognitive reasoning than humans. 

Don’t miss this article in which we explore why equity investors think that the AI-powered rally in US stocks has further to run — but why the “wake-up call” from DeepSeek is likely to reorder the winners and losers.

Last men standing

Short selling is not for the faint of heart. 

In a recent post on X, short seller Matthew Earl of ShadowFall joked that the practice involves “excruciating masochistic pain in the hope of then looking quite the man about financial town sometime later”.

Perhaps no wonder then that Nate Anderson, the founder of Wall Street’s top activist short seller Hindenburg, announced last month that he was hanging up his boots. 

Anderson, who was best known for betting against electric-vehicle manufacturer Nikola, Carl Icahn and India’s Adani Group, is just the latest high-profile investor to call it quits. 

He blamed the “intensity and focus” of the job. But activist short selling, where investors bet against companies and mount highly public campaigns, has become harder in a powerful bull market that many in the business say has made it difficult to generate returns.

Even non-activists’ shorts have struggled: Jim Chanos shut his main short-focused hedge funds in 2023 after more than three decades. Bill Ackman, another high-profile investor who used to take both long and short positions, said in 2022 that he would stop running public campaigns.

“Usually when people exit the short selling business it’s because they have had significant failures or reversal of fortune,” said fellow short seller Carson Block of Muddy Waters. “In Nate’s case he is going out on top.” 

Sued by company executives, shunned by banks who are afraid of jeopardising client relationships and investigated by regulators, activist short selling can take a toll on its practitioners. 

“Companies used to be very shy litigating against short sellers, but now they are less shy,” said Gabriel Grego, founder of hedge fund Quintessential. 

Don’t miss this story by my colleague Costas Mourselas in which he looks at the shrinking group of short sellers who are still standing. And go inside the world of the undercover hedge funds financing activist short sellers with our Big Read from November.

Chart of the week

European stocks outpaced other major global equity markets last month, as fears of sweeping US tariffs subsided and investors fled the shakeout in Wall Street technology stocks.

The Stoxx Europe 600 index gained 6.3 per cent in January, its largest one month percentage gain since November 2023, while the US’s S&P 500 index was up 2.7 per cent.

London’s FTSE 100 index rose to a fresh record high on Friday to end January up 6.3 per cent, its best monthly performance since November 2022, when markets rebounded following then prime minister Liz Truss’s ill-fated “mini” Budget two months earlier.

The gains have sparked renewed hopes of a sustained revival in Europe’s equity markets. While some have at times performed strongly — Germany’s Dax rose by nearly one-fifth last year — as a whole the continent has lagged well behind the US over the past decade.

“After so many years of underperformance, not much needs to happen before everyone becomes excited . . . Everyone is getting warm about Europe,” said Roland Kaloyan, a strategist at Société Générale.

Investors piled into US stocks last year amid excitement about the growth of artificial intelligence, with a small group of tech stocks once again driving gains.

At the same time, US President Donald Trump’s tariffs threats weighed on Europe, which sends roughly one-fifth of its exports each year to the US, while homegrown political crises in countries such as France diminished investors’ appetite for bonds and equities alike.

But January saw the biggest rotation from US stocks into Eurozone stocks in almost a decade, according to Bank of America, as investors fled richly valued tech stocks in favour of European defensive and growth stocks, including banks, pharmaceuticals and luxury retailers.

Last week’s global tech sell-off sparked by Chinese start-up DeepSeek’s advances in artificial intelligence has only accelerated this shift, analysts said.

After the AI wobbles, “investors have been moving towards . . . Europe”, as the region has less exposure to technology stocks, said Mohit Kumar, an economist at Jefferies.

Five unmissable stories this week

McKinsey is considering spinning off its controversial in-house asset manager MIO Partners, and has hired boutique investment bank Ardea Partners for a strategic review.

Elon Musk clashed with Nicolai Tangen, chief executive of the Norwegian oil fund, after the fund last year voted against the Tesla boss’s huge pay package.

Deutsche Bank’s asset manager DWS has named EY as its new group auditor despite taking the accounting firm to court for its involvement in the Wirecard scandal.

The combination of leverage and time is a critical one to recognise in any portfolio blueprint, writes Pimco co-founder Bill Gross as he outlines some lessons from his investing career.

St James’s Place reported a record £190.2bn in assets under management despite a drop in net inflows over the past year, as the UK’s largest wealth manager attempts to cut costs and repair its image.

And finally

Night time for artists is often a period of intense activity, or an opportunity to experiment with new techniques. Nocturnes at my friend Lyndsey Ingram’s gallery in Mayfair brings together a group of artists who examine the experience, character and subject matter of night time. The show encompasses painting, drawing, printmaking and sculpture, and features artists including Frank Auerbach, David Hockney and Tom Hammick.

Until March 21, https://lyndseyingram.com/