The Big Hedge Funds Were Selling Big Tech—Time to Take Profits?

A number of the major hedge funds and big money managers, including the Bill & Melinda Gates Foundation, which axed its Microsoft (NASDAQ:MSFT | MSFT Price Prediction) stake by nearly 65%, were big net sellers of big tech in the third quarter. And while there were buyers of big tech companies, including the likes of Warren Buffett’s Berkshire Hathaway (NYSE:BRK-B), which started a new position in Alphabet (NASDAQ:GOOG), which has been spared from the latest tech wreck, it’s hard to overlook the broad profit-taking in the smart money in the quarter that ended September.

As it turned out, selling a bit of big tech, which, of course, includes the likes of the beloved Magnificent Seven companies, marked some pretty good timing, with the Mag Seven-heavy Nasdaq 100 now down around 8% from its peak in late-October. Not even the great Nvidia (NASDAQ:NVDA) with a robust beat and raise was able to save the markets from continuing their spill as several red-hot trades continued to go on the retreat. Looking back, the hedge funds, many of which sold, look quite smart. But the big question for investors is whether it’s too late to follow in their footsteps.

Alphabet and Apple shares hold steady amid tech wreck

Though Alphabet and Apple (NASDAQ:AAPL), which I previously highlighted as a stock that might be spared in an AI bubble burst, are holding up far better than the S&P 500, I wouldn’t be so quick to take profits in the names, especially when you consider the “Warren Buffett premium” slapped on both companies.

Of course, Berkshire trimmed its stake in Apple further in the third quarter, but, for the most part, both names seem to be mostly steady in the face of an AI sell-off that’s primarily targeting the market’s pricier names that have been pouring tons of capital into AI bets, especially the ones that have taken on significant debt to do so.

This isn’t the first barrage of fears about potentially lower or farther out ROIs (return on investments) from AI, and it probably won’t be the last. And while I doubt the latest correction is over with (the S&P 500 has only dropped 5% from its high), I also don’t think this is the AI bubble burst that many seem convinced is happening right now.

A bad correction with AI in the blast zone? Most definitely. Maybe even a bear market at some point down the line. But a repeat of 2000-01 that saw the Nasdaq 100 fall nearly 80%? Probably not. I’d argue this latest sell-off is more akin to the market drop of 2022 than anything else. And those who stayed the course came out doing well in a year or so after the market eventually bottomed.

It’s a nervous time for new investors heavy in the Mag Seven and the rest of AI-driven tech

For investors who are feeling a bit startled, either due to hedge fund selling of big tech in the third quarter, or due to Dr. Michael Burry’s comments, or short bets (it’s worth noting he’s since closed the doors over at Scion Capital Management), perhaps it’s time to think about putting more new money to work on defensive plays could be a good idea, especially if you’ve got too much risk in tech.

If there are still profits to take off the table, perhaps with the likes of an Alphabet or Apple, I’m certainly not against doing some ringing of the register if you don’t have much of anything beyond big tech at the core of your portfolio. At the end of the day, diversification is key, and it’s the boring dividend-paying defensives that can help you get through turbulent times.

So, is it still prime time to take profits?

If you’re a long-term investor who’s sticking with AI through thick and thin, it’s not the time to panic or sell. However, if you’re underdiversified and can’t handle intensifying volatility, a slight trim could make sense. Of course, it’d be best to consult a financial advisor for the best course of action, especially if you’re still rattled by the past week of selling pressure. As for what the hedge funds are up to at this moment, we’ll find out in a few months’ time.

Who knows? Some might be buying back what they trimmed at a discount now that the Nasdaq 100 is flirting with a correction. That’s why responding to hedge fund moves after the fact (after an 8% drawdown in the Nasdaq 100) might not be the best bet.