The Swiss private bank, which says it remains positive on US equities and tech, held a panel discussion in London to examine issues such as AI's impact, concentration risks in equities, and the perspectives of the fixed income side.

Concentration risk is on wealth advisors’ minds right now after the SpaceX IPO and the giddy ascent of AI-linked tech stocks. 

A challenge for investors is how to pivot rapidly when the days of capturing this market “Beta” need to be replaced by the search for superior returns, or “Alpha”, panellists at a media event, hosted by Union Bancaire Privée, heard this week. 

The S&P 500 Index of US stocks is more concentrated than at any point since the late-1990s tech bubble and the 10 largest stocks, such as Microsoft, Apple, NVIDIA, Amazon, Alphabet, and Meta, account for almost 40 per cent of the index’s total market capitalization. In a 17 June note, another Swiss bank, UBS, pointed out that the comparable concentration was about 25 per cent during the 1990s dot-com era and just 15 per cent in 1980.

Average correlations within strategies linked to AI businesses are as high as 0.8, Joe Kelly, partner at Campbell & Company, said in the panel discussion, held in London’s Mayfair district. (Campbell is a US-based systematic investment manager that has partnered with UBP to offer liquid alternative strategies.)
[The question] is “how to pivot away from the Beta in AI to the Alpha in that?” Kelly said.

“Clients are really happy and their portfolios are doing marvellously but the risks of loading [up] from these are greater and greater,” Kelly continued.

Spencer Waxman, founder and portfolio manager at Shannon Rival Capital Management, speaking on the same panel, said the AI-influenced equity cycle and other cycles shared the common feature of customer concentration. “You have a handful of companies that are doing the spending,” he said, wondering what will happen if one of the larger players hits trouble. (Shannon is a New York-based hedge fund.)

The market at present appears to take a “black and white” view of AI-related stocks: it is either optimistic or the reverse, Waxman said.

Positions
The Geneva-headquartered bank recently set out its hedge fund strategy views for June. It remains positive on US equities and technology, but is not chasing the rally in stocks; it has upgraded its position on utilities; it is constructive on the dollar and has trimmed dollar hedges in non-dollar portfolios, and has slightly cut its tactical stance on gold. UBP says a reopening of the Strait of Hormuz will be a trigger for broader market participation, particularly benefiting European stocks. 

UBP invests $17 billion in alternative investments, including hedge funds.

Don Morgan, chief investment officer and founder of Brigade Asset Management, said his focus on the fixed income side meant that he tends to concentrate on protecting clients’ capital rather than trying to find the upside, apart from certain cases. 

“On the long side we need to work out who benefits from that,” he said, alluding to the idea of holding an AI-related bond on the expectation that it will appreciate.

Sector-wise, one sector that looks to benefit from AI, and create opportunities for his approach, is healthcare, Morgan said. To succeed in the fixed income area where AI is part of the mix, Morgan said “you need to be in liquid funds so that you can pivot.”

“For credit investors, AI is more risk…we are playing it through utilities, copper and healthcare,” he said. (Brigade Capital Management partners with UBP.)

Morgan said that in the current environment, as far as credit investors are concerned, “the time is not to take too much risk…there will be a dislocation”.

In the near term, the AI story, given demands on energy, rare earths and manufacturing capacity, is likely to be inflationary, but will be deflationary further ahead as efficiencies and consolidation kick in, as happened with the earlier iterations of the computer age, he said. 

Brian Hessel, chief operating officer, chief credit risk officer and co-founder of Global Credit Advisers, talked about credit cycles and what opportunities AI might offer. Credit yield spreads are tight now and there are not many opportunities for long-positioned investors.

“There will be a time when you are able to short some of this,” Hessel added.