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HomeTechNvidia's rally forces money managers to catch up

Nvidia’s rally forces money managers to catch up


Big money managers missed the rally in Nvidia and spent the past two weeks catching up, racing to amass shares of the US company that has become a go-to bet on artificial intelligence.

State Street, Fidelity, Amundi, Ameriprise’s Columbia Threadneedle and Loomis Sayles all cut positions in Nvidia in the first quarter of 2023 before a powerful rally pushed the chipmaker’s valuation to $1 trillion, securities filings showed. An analysis by Goldman Sachs shows they were far from alone: ​​Mutual funds were broadly reducing exposure to Nvidia in early 2023, making the stock one of their most underweight positions.

But fund managers are charging again, according to interviews with traders at Wall Street banks. Mutual funds and hedge funds are seeking to supplement their positions in Nvidia, other AI-linked growth stocks such as Advanced Micro Devices and semiconductor exchange traded funds.

“A lot of people were underweight in the growth space overall after 2022,” said Brian Bost, co-head of equity derivatives for the Americas at Barclays. But now, he said, “we are at a point where many people are being forced to go into the market.”

That helped support Nvidia’s share price, which jumped from $305 per share to a high of $419 after the company reported strong earnings on May 24 and issued excellent revenue expectations, citing demand for chips used in generative AI.

Traders noted that purchases were cushioned by a lack of willing sellers of Nvidia stock, meaning many deals consisted of relatively small lots. Daily volumes more than doubled to an average of $32 billion, but trading desks said on some days they could not meet demand.

The stock has since come off its all-time high, closing Tuesday at $386.54, which Wall Street traders said has met demand for now.

Many funds programmatically bought up Nvidia shares, using algorithms to guide their purchases, traders said.

“Honestly, I’ve never seen such a guideline change,” said a tech trader at a Wall Street bank, adding that after the company released its latest numbers, “people are calculating and it’s becoming something (they) have to own . . . the pursuit (was) on.”

Technology stocks occupy relatively small positions in many mutual funds compared to their weighting in the S&P 500 index, the benchmark used to judge the performance of many managers. Nvidia now makes up 2.7 percent of the S&P 500, up from 1.1 percent at the end of 2022.

Many fund managers have chosen to keep technology holdings light, in part to avoid concentrated bets on individual companies. But underweight has led to relative underperformance.

The problem is acute for growth stock funds, as the top seven names in the Russell 1000 growth index — Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta — account for a whopping 42 percent of that, according to Goudman.

Line chart of weight in the S&P 500 (%) showing that big tech has gained increasing weight in the benchmark S&P 500

Stuart Kaiser, head of U.S. equity trading strategy at Citi, said the dramatic recent rises in technology stocks “made people a little uncomfortable . . . but no one wants to miss it.”

Traders said buying was broad-based, lacking the fingerprint of large transactions from a single participant, such as family office Archegos Capital Management, which shocked markets when it collapsed in 2021. The armies of retailers who once organized on social media to buy stocks are now not so visible.

Even large hedge funds had to move quickly.

Three Wall Street prime brokers that trade with hedge funds — JPMorgan Chase, Bank of America, and Morgan Stanley — were all among the top 10 Nvidia investors at the end of March. The previous quarter, only one investment bank was such a large holder.

Wall Street views such broker positions as a rough proxy for hedge fund positions. Brokers regularly provide hedge fund exposure to equities through equity swaps, where the broker buys the underlying asset and enters into derivative contracts that reflect the rise or fall of a stock.

Several major hedge funds had reduced positions in Nvidia in the weeks leading up to May 24, hoping to reap profits after the stock more than doubled since late last year, the trading desk heads said.

But the rally that followed the company’s new guidance prompted funds to dive right back in.

In another type of derivatives trading, investors bought put options on Nvidia ahead of the results, said Akshay Narayanan, head of stock options trading at Optiver, a proprietary trading firm. Put options pay out if the price of a security falls below a certain level on a certain date.

But since May 24, investors have traded more bullish call options.

“People were asking ‘is this valuation a bit over the top, was a big part of this share price increase quite speculative?'” Narayanan said. “But the earnings could give much more substance. . . now (investors) are asking if the uptick is enough.”

Line chart of the number of options contracts traded each day (mn) showing that Nvidia's options trading volumes have skyrocketed

Traders expect recent volatility to continue. Option prices indicate traders are expecting twice the normal price swing around the date of Nvidia’s next quarterly results. Traders are also predicting swings around events such as AMD’s upcoming “AI Technology Premiere”.

Fidelity, State Street, Amundi, Ameriprise and Columbia Threadneedle declined to comment. Loomis Sayles said it owned 11.5 million shares of Nvidia across several investment teams, with the vast majority in growth strategies being “a long-term holder of the shares.”

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