Investors are increasingly seeking strategies to shield their portfolios from concentrated exposure to artificial intelligence (AI) as the sector becomes deeply embedded in both US equity and credit markets. The reliance on AI-driven companies has raised concerns over the potential risk of sudden shifts in market sentiment, prompting fund managers to explore more diversified and uncorrelated asset classes.
Research from Citigroup indicates that more than two-thirds of the Russell 1000 Index constituents are either directly involved in AI or are incorporating the technology into their business models. Meanwhile, data from JPMorgan reveals that Big Tech “hyperscalers” and companies benefiting from AI-related spending now account for roughly 16% of the US investment-grade bond market, positioning them as the largest segment within that space amid recent borrowing surges.
This concentration poses challenges for portfolio diversification, according to industry professionals. Vincent Mortier, chief investment officer at Amundi, described the AI theme as “very powerful” but warned that a significant earnings revision could alter the current trajectory. “It’s not imminent,” he said, “but I think it will come.” Similarly, Ryan Marshall, BlackRock’s global head of multi-asset strategies and solutions, underscored the demand for portfolios that incorporate independent, uncorrelated sources of return amidst the predominance of AI-related exposures. He highlighted the complex web of secondary connections through AI suppliers, such as power, infrastructure, and supply chains, which further link investments to broader economic trends.
As a result, multi-asset investors are looking beyond traditional equities and credit to hedge funds, private assets, and emerging markets in search of diversification. Marshall pointed to hedge funds that offer return streams uncorrelated with broad market risks, including managers employing global macro and equity long-short strategies. Mortier echoed this view, emphasizing the growing appeal of hedge funds while noting the challenge of identifying suitable managers open to new investments. He also cited increasing interest in local currency stocks and bonds across emerging markets such as Latin America, India, and China.
Alternative defenses in portfolios include fundamental real assets, with Mortier highlighting mining and renewable energy as sectors that provide tangible diversification benefits. Daniel Gamba, co-president and chief commercial officer at Franklin Templeton, reported growing systematic hedge fund demand and efforts to evaluate AI as a factor—alongside value, momentum, and growth—to mitigate volatility. Gamba maintained a cautiously optimistic stance on US equities, albeit less bullish than earlier in the year, stressing the importance of diversified exposure rather than concentrating on AI-heavy firms.
In fixed income, Franklin Templeton is focusing on shorter-duration bonds and avoiding significant exposure to long-term rate risk, except for income-seeking investors. Gamba advised caution regarding factor diversification risk and urged investors to avoid excessive concentration in AI-related companies, recommending a more defensive approach while not anticipating an imminent market sell-off.
Drawing parallels to pre-financial crisis complacency, Mortier referenced comments from former Citigroup CEO Chuck Prince, warning that “the music will stop playing at a moment in time,” though predicting the timing of such a shift remains difficult. In this context, fund managers prioritize diversification strategies to navigate the growing dominance of AI across financial markets.