Sharp swings across individual stocks, driven by shifting expectations for artificial intelligence, oil-market upheaval and rising bond yields, are creating renewed opportunities for hedge funds using equity dispersion strategies, according to a report by Bloomberg.

The trade, which seeks to profit from differences in the performance of individual stocks while hedging broader market exposure, is becoming more attractive as companies within major indices increasingly move in opposite directions.

AI has been a major source of that divergence. Enthusiasm over developments such as Meta Platforms’ Muse AI agent has been offset by concerns that rapid advances in AI could disrupt industries ranging from banking to travel services. At the same time, geopolitical developments surrounding conflicts in Iran and Ukraine have produced sharp moves in energy stocks, while a sustained rise in Treasury yields has increased borrowing costs.

“Agentic AI winner-and-loser” trades have consequently become a particular focus for investors, according to Alex Kosoglyadov, head of flow equity-derivatives sales at Nomura Holdings.

The dispersion opportunity arises when stocks within an index such as the S&P 500 move in different directions, reducing the correlation between constituents even as individual shares experience large price swings.

Single-stock implied volatility has fallen since late July, particularly among some of the technology stocks that have driven the market higher, potentially providing a more attractive entry point for dispersion strategies.

The gap between volatility on individual stocks and that of the broader S&P 500 is also starting to widen again. Traders can seek to exploit that difference by buying options on individual companies while selling index options, positioning for greater divergence between constituents.

The setup could become more pronounced as the next earnings season approaches. Company-specific results and guidance can create sharp moves in individual shares, potentially producing greater dispersion than periods dominated by a single macroeconomic theme.

Options activity suggests investors are positioning for further volatility in AI-related stocks. he realised one-month absolute return of S&P 500 constituents relative to the index has risen to the 95th percentile of its historical range over the past three decades.

Meanwhile, the Cboe Global Markets one-month correlation index, which had been recovering from a record low in July, declined again during the latest week, another indication of increasing differentiation between stocks.

The opportunities extend beyond technology. Energy markets are providing another potential source of dispersion, with refiners and oil producers facing different effects from changes in crude prices and geopolitical developments.

Software stocks have also been subject to rapid changes in investor expectations over the potential impact of AI, creating opportunities for strategies based on differences between individual companies.

However, dispersion is already a well-established hedge fund strategy and its popularity means some investors are questioning whether the trade has become overcrowded.

Banks offer sophisticated versions of the strategy, but hedge funds can also construct their own positions using listed options. For investors operating in a market characterised by low conviction and sharp reversals, simpler approaches can involve taking positions in selected stocks while using index options to manage broader market risk.