Hedge funds have increased their exposure to US technology stocks as the Nasdaq 100 returns to record territory, with investors increasingly betting that the artificial intelligence-driven rally can extend further, according to a report by Bloomberg.

The Nasdaq 100 rose 0.8% on Tuesday to close at a record, recovering from a sharp sell-off earlier this year that had left the technology-heavy index more than 10% below its previous peak.

Flows into technology-focused US exchange-traded funds have also accelerated. Investors have committed around $22bn to tech ETFs during the third quarter, compared with $4.6bn flowing into ETFs focused on the remainder of the US equity market, according to Bloomberg Intelligence data.

Hedge funds have meanwhile lifted their net-long exposure to Nasdaq 100 futures to its highest level since December, according to the latest data from the Commodity Futures Trading Commission.

The positioning reflects renewed confidence in the earnings outlook for the large technology companies that have driven much of the US equity market's gains, although investors remain alert to risks including inflation, monetary policy and geopolitical tensions.

Other indicators also point to increasing appetite for US equities. Goldman Sachs Prime Services data showed the strongest net buying of US stocks in five weeks last week, led by software companies. Meanwhile, US equity funds attracted almost $64bn in weekly inflows through 16 September, according to Bank of America strategists citing EPFR Global data.

Cash funds recorded their largest outflow in nine weeks during the same period, suggesting investors have been moving capital back towards risk assets.

However, some strategists have questioned whether investor positioning has moved too far ahead of the underlying earnings outlook.

Market breadth has also weakened, with Bloomberg data showing that as many as 6% of S&P 500 constituents have touched new 52-week lows during September, a level not seen since October.

The performance of the technology megacaps remains central to the sustainability of the wider US equity rally. Investors are looking to upcoming third-quarter earnings to provide further evidence that the substantial investment in AI infrastructure is translating into stronger corporate profits.

Analysts expect information technology companies in the S&P 500 to deliver profit growth of around 64% in the third quarter, compared with an estimated 24% increase across the index as a whole.

The strength of the AI-led rally is nevertheless being tested against a backdrop of lingering uncertainty over interest rates and inflation. Investors remain conscious of the damage caused by restrictive monetary policy during previous market cycles, including the Federal Reserve's aggressive rate increases beginning in 2022.