AI Investors Seek Protection as Technology Shares Fall

Investors who placed large bets on artificial intelligence are increasingly seeking protection against losses as concerns grow over the sector's financial outlook. The Wall Street Journal reported Saturday that shareholders and technology executives are turning to instruments including put options and credit-default swaps after enthusiasm for AI's economic potential drove substantial investment.

The shift comes amid higher borrowing costs for major data center developments and chip purchases, declining AI company shares and a wider market retreat. Friday's technology selloff erased more than $1 trillion in market value, according to NBC News. The Nasdaq 100 lost 3.4%, the S&P 500 fell 1.8%, and the benchmark's technology sector dropped more than 4.2%.

Despite that pressure, AI companies are still pursuing billions of dollars to build infrastructure and expand their operations. For some investors, however, safeguarding wealth already accumulated through technology stocks has become more important than seeking additional returns, according to Stephen Solaka, a senior vice president at Gateway Investment Advisers.

“We’re seeing really significant demand from folks looking to protect downside,” Solaka said. He also noted that some companies restrict employee trading. One indication of the appetite for protection came from CoreWeave, the AI cloud infrastructure company. Cboe Global Markets data showed that trading in put options linked to its shares reached a record in October and stayed elevated.

Put options allow holders to sell shares at a price agreed in advance before a specified date. Shareholders can use them to limit losses during a sharp decline, although purchasing that protection requires paying a premium. Credit-default swaps address a different risk, providing protection against a borrower failing to repay debt.

According to the Journal report, the cost of protection against debt defaults at Amazon, Alphabet, Microsoft, Meta and Oracle rose during the past month to levels last seen in 2021. Eugene Grinberg, co-founder of bond data provider Solve, said the increases across those companies pointed to concern about the sector as a whole rather than credit problems at particular businesses.

Protection is also becoming available for businesses exposed to the price of computing power. Jump Trading has started offering financial contracts designed to guard against a potential price collapse. Companies renting out Nvidia chips, for example, could secure a minimum rental price to protect revenue if demand for AI computing weakens.

The interest in these instruments recalls The Big Short, which depicted investors using credit-default swaps to bet against mortgage-backed securities before the 2008 financial crisis. Many technology shareholders now seeking protection have a different purpose: preserving gains from the AI boom without necessarily wagering on a market collapse.