Chinese Hedge Funds Flag Risks to AI Trade After Bets Sour

Chinese hedge funds that bet big on artificial intelligence this year are largely sticking with the trade despite a sharp downturn in their fortunes. But they have a few concerns.

The most bullish of seven funds behind investor letters seen by Bloomberg News told investors the pain had come to an end, at least for now. Shanghai Chaser Asset Management Co., which like most of the funds manages more than 10 billion yuan ($1.5 billion), said a wild selloff in July marked the bottom of the current cycle. Intewise Capital Management’s Liu Xiaolong said the correction was “probably over.”

But some fund managers also delved into the details. They pointed to the extreme spending needed to keep the current cycle on track, the risk to jobs and the uncertainty of an investment rush that one fund manager compared to “blind men feeling an elephant.”

Their views offer a glimpse into how money managers in the world’s second largest economy see a technology that has sent ripples throughout global markets. And despite much of the talk around AI pitting the US against China, the fund managers overwhelmingly focused on global problems rather than those specific to their domestic economy.

Hunjin Capital said AI firms would need annual recurring revenues to hit as much as $700 billion next year to keep pace with their spending, implying a jump of around $500 billion. That would suggest that in coding alone, AI needs to displace 4 million workers, the firm said.

Beijing Ren Bridge Asset Management devoted a section of its August letter to Nvidia Corp.’s bullish guidance for the next fiscal year. It drew an analogy to Microsoft Corp.’s troubled launch of Windows Vista almost two decades ago, which triggered demand for new hardware but ultimately weighed on the company’s share price.

While Nvidia has now grown into a “giant dragon” itself, “it may have forgotten its own youth and its original purpose,” Ren Bridge wrote in the WeChat article. “But cycles always recur and a new one may be dawning.”

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Lu Hang, chairman and portfolio manager at Shanghai Fusheng Assets Management Co., described AI as a “generational variable” in its July letter. But the firm also suggested the time for easy profits has come to an end, adding that stock selection was moving from “who invests more, to who invests better.”

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Of the seven funds that sent the letters, four were betting on AI — sticking with their bias before the July rout, although in some cases trimming their positions. Those four still recorded gains of at least 19% for the year through July 31, despite the recent tumult. But three funds which had stayed largely out of the AI hardware trade — managed by Ren Bridge, Ridou Investment Management and Qinchen Asset Management — were all down by more than 8%, the letters showed.

Shanghai Chaser, Ren Bridge, Intewise, Ridou, Qinchen and Fusheng all manage more than 10 billion yuan, according to data from the country’s asset management association. Hunjin Capital oversees more than 5 billion yuan.

Fusheng didn’t reply to a request for comment. The other firms declined to comment.

Chaser’s globally allocated fund dropped 34% in July while Intewise’s multistrategy vehicle lost 29%, according to the firms’ investor letters. Those numbers compare with an 8% decline in the benchmark CSI 300 Index. But the two were still up more than 30% for the year to Aug. 31.

Even Hunjin Capital’s Yueyang fund which cut its AI exposure by about 40% before and during the rout lost 12.6% in July. The fund posted a small loss last month, although it was still up around 16% for the year.

The question the bulls now face is not simply which parts of the trade will pay off, but for how long. “AI hardware demand itself is very strong, and for 2027, too,” Intewise’s Liu wrote in the firm’s August letter. “But beyond 2028, nobody can say.”