Hedge funds are increasingly reassessing their exposure to technology stocks and rotating towards defensive equities as concerns over the sustainability of the artificial intelligence-driven bull market prompt a broader shift in institutional positioning, according to a report by the Financial Times. 

The rotation gathered pace in October, when the MSCI global consumer staples index rose 10.6%, its strongest monthly performance since 1998. Global healthcare stocks gained 9.8%, their second-largest monthly advance of the century. By comparison, the MSCI global technology index has fallen more than 13% since the beginning of October.

For hedge fund managers, the changing market environment has increased the importance of sector allocation and downside protection. The recent technology sell-off has challenged portfolios that benefited from concentrated exposure to AI-related companies, while creating opportunities for managers to reposition towards businesses with more predictable earnings and cash flows.

Guy Miller, chief market strategist at Zurich, said technology had lost some of its appeal as investors sought greater diversification. The shift reflects growing concerns that the substantial capital expenditure committed to AI infrastructure may not generate the earnings growth currently anticipated by markets.

Several established defensive companies have benefited from the rotation. Walmart has gained 15% since the Nasdaq 100 peaked on 6 October, while Procter & Gamble and Coca-Cola have each advanced approximately 10%.

Citi has downgraded its recommendations on US and global technology equities from overweight to neutral, citing rising credit spreads, weaker earnings revisions and deteriorating investor sentiment towards AI. Its strategists believe defensive stocks could continue to outperform more cyclical sectors into next year.

The shift has also benefited European equities, which generally have lower exposure to technology stocks than their US counterparts. The Stoxx Europe 600 gained 1.5% in November, while the Nasdaq 100 declined by more than 2%, providing some support for managers seeking to diversify geographically.