You Won’t Believe How Nvidia’s Rally is Forcing Money Managers to Play Catch Up!

The big money managers missed out on Nvidia’s rally and have spent the past two weeks catching up, racing to pile up shares in the US company that has become a gamble on AI.

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

But fund managers have loaded up again, according to interviews with traders at Wall Street banks. Mutual funds and hedge funds scrambled to increase their positions in Nvidia, more Artificial intelligence growth stocks such as Advanced Micro Devices and semiconductor exchange-traded funds.

“Many people were underweight the overall growth space post-2022,” said Brian Bost, co-head of equity derivatives for the Americas at Barclays. But now, he said, “we’re at a point where a lot of people are being forced into the market.”

This helped support NvidiaThe stock price of , which jumped from $305 a share to a high of $419 after the company posted strong earnings and issued windfall revenue guidance on May 24, citing demand for chips used in generative AI .

Traders noted that the purchases were met with a shortage 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 were unable to satiate demand.

The stock has since fallen off its highs, closing at $386.54 on Tuesday, which Wall Street traders said indicated demand has been met for the time being.

Many funds have been buying Nvidia stock programmatically, using algorithms to help guide their purchases, traders said.

“Frankly, I’ve never seen a change of direction like this,” said a tech trader at a Wall Street bank, adding that after the published company his latest data, “people do the math and it becomes something [they] having to possess. . . the pursuit [was] ON”.

Technology stocks held relatively small positions in many mutual funds relative to their weightings in the S&P 500 index, the benchmark used to judge the performance of many managers. Nvidia now accounts for 2.7% of the S&P 500, up from 1.1% at the end of 2022.

Many fund managers have chosen to keep tech holdings light for reasons that include avoiding concentrated bets on individual companies. But the underweight led to relative underperformance.

The problem has been acute for growth stock funds, as the seven biggest names in the Russell 1000 growth index — Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta — make up a staggering 42% of it, according to Goldmann.

Stuart Kaiser, head of US equity trading strategy at Citi, said the recent dramatic rises in tech stocks “have made people a little uneasy. . . but nobody wants to do without it”.

Traders said the purchases were broad-based, lacking the fingerprints of large deals made by a single participant like family office Archegos Capital Management, which rocked markets when it collapsed in 2021. Armies of retail traders who once organized on social media to buy stocks are now not so visible.

Even the big hedge funds had to change course quickly.

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

Wall Street views these broker holdings as a rough proxy for hedge fund positions. Brokers routinely provide hedge funds exposure to stocks through equity swaps, where the broker buys the underlying stock and enters into derivative contracts that mirror a stock’s rise or fall.

Several large hedge funds had trimmed positions in Nvidia in the weeks leading up to May 24, hoping to lock in profits after the stock had more than doubled since the end of last year, according to trading desk officials.

But the rally that followed the company’s new leadership prompted funds to plunge again.

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

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

“People were asking, ‘Is this valuation a bit stretched, has much of this bull run in the stock price been quite speculative?’” Narayanan said. “But the earnings have been able to provide much more substance. . . Now [investors] they are asking if the increase is sufficient.

Traders expect the recent volatility to continue. Options prices indicate that traders expect double the normal swing in the stock price around the date of Nvidia’s next quarterly results. Traders are also expecting swings around events like AMD’s upcoming “AI Technology Premiere.”

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