Recent declines in momentum-driven equities may be approaching a turning point, with investors beginning to look for re-entry opportunities in artificial intelligence and semiconductor sectors, according to analysis from UBS’ trading desk. Data from UBS prime brokerage points to substantial reductions by hedge funds in these segments, bringing exposure down to levels last seen in April.
UBS reported that hedge funds have trimmed their exposure to momentum and semiconductor holdings by about 5% in gross market value—one of the steepest drawdowns documented—according to its prime brokerage statistics. This scaling back has led to net positioning in the affected sectors reverting to their standing earlier this year.
Despite this pullback, Michael Romano, who oversees hedge fund equity derivative sales at UBS, noted in a client communication that renewed strength in artificial intelligence fundamentals supports a strategy of accumulating shares following recent declines. Romano advised investors to gradually reestablish their positions rather than making a full commitment immediately. Momentum-based strategies typically involve taking long positions in outperforming stocks and shorting those underperforming.
Romano described the recent reduction in momentum exposure as a deliberate and well-supported move. Incremental steps to rebuild positions are recommended, reflecting prudent risk management.
According to Romano, current portfolio positioning increasingly favors a rebound among momentum equities. However, a recovery within artificial intelligence and related momentum shares might precede reversals in sectors that recently benefited from short covering, such as banks and industrials. UBS’ data suggest that recent gains in those areas likely stemmed from covering earlier short positions, indicating a potential vulnerability should capital rotate back to AI and technology.
Romano anticipates that the reduction in momentum exposure could bottom out by late July, or may already have done so. Supporting this, UBS observed a sharp turnaround in its momentum gauge last Friday, reversing a 3.5% loss early in the session to finish up 2.5% just hours later. Romano expects a strong recovery once liquidity trends shift.
Morgan Stanley has shared a similar stance. Earlier this week, the firm said that the latest declines in memory-related stocks have created favorable openings for investors targeting firms poised to benefit from persistent chip supply shortages. Though prices for memory products have climbed about 25% in the third quarter, the rate of increase is slower than in previous periods.
Market demand for memory and storage remains robust, bolstered by AI data center growth, creating ongoing supply constraints and upward price pressure across the sector. Suppliers have been expanding capacity to satisfy demand, while buyers are entering into longer-term agreements to secure stable supply and pricing.
