Hedge funds fold on the AI trade as retail piles into Nvidia, says Morgan Stanley’s Savone

Wall Street professionals and individual investors are interpreting the same market signals but reaching dramatically different conclusions. According to Morgan Stanley's Nick Savone, hedge funds have aggressively reduced their exposure to AI-related investments, while retail traders continue to accumulate shares of Nvidia, the chipmaker serving as a bellwether for artificial intelligence spending.

The backdrop for this divergence is a significant market correction. Savone described a record 70% crash in tech momentum stocks, representing a violent unwind of the very shares that had been driving market gains higher.

Professional investors retreat

Institutional investors have responded to the market turbulence by de-risking their portfolios aggressively. Savone reported that hedge funds' net leverage has fallen to the 0th percentile of the past year, meaning they currently carry less market exposure than at any other point in the last twelve months.

Net leverage measures the difference between a fund's long and short positions, and sitting at the 0th percentile represents an extreme reduction in risk exposure. Savone framed the current situation as being at mile 20 of a marathon, suggesting the race is far from over.

Retail investors accumulate

While institutions trimmed their positions, individual investors moved in the opposite direction. Savone's analysis indicates retail traders were heavy buyers of Nvidia throughout this period. The stock had been Morgan Stanley's top semiconductor pick in early October with a $300 price target, though it was removed from that position in November after falling more than 25%.

Market resilience signals

Despite the hedge fund selling, the broader market showed resilience. The S&P 500 rose 2.5% in the week following Savone's commentary, snapping a four-week losing streak for the benchmark index. This gain occurred while professional positioning remained at yearly lows.

The research summary suggests that retail demand could help establish a price floor under certain tech stocks while institutions remain cautious. However, the divergence between institutional and retail behavior could lead to increased volatility, particularly if professionals begin re-entering the trade they recently abandoned.

Looking ahead, three key indicators will determine market direction: rising hedge fund net leverage would signal professionals returning to the trade, Nvidia's price action will reflect retail sentiment toward AI, and whether the S&P 500 can build on its recent weekly gain will indicate whether a new trend is emerging.