It’s a historic moment for markets, with stocks, gold and Bitcoin all marching to record highs as Wall Street fully embraces the AI boom and bets on continued dollar weakness fueled by rate-cut expectations.
Yet, one group of investors is not buying the hype—they’re unloading their risk exposure at a historic pace.
Bank of America’s latest Equity Client Flow Trends report shows that hedge funds have been net sellers of U.S. equities for four consecutive weeks, with the four-week average of outflows reaching a record low of negative $2.1 billion.
That's the steepest sustained selloff by hedge fund clients since the data started.
So, what’s spooking the smartest money on the Street?
Are Hedge Funds Betting Against AI Mania?
While fears of a bubble forming in artificial intelligence and tech stocks grow louder, Bank of America data suggests hedge funds aren’t entirely fleeing the sector.
Read also: Fear Of An AI Bubble? This Time Is Different, Goldman Says
In the most recent week, hedge funds actually bought $52 million of individual tech stocks while selling $129 million from tech-focused exchange-traded funds, resulting in a relatively muted net outflow of $ 77 million.
This subtle rotation hints at strategic positioning rather than outright panic over AI.
Is The Real Fear Coming From Financials And Private Credit?
The heavier hits came elsewhere. Hedge funds dumped $670 million of financial stocks last week, making financials the most aggressively sold sector.
“Financial flows are the most negative since mid-Nov. amid a weakening job market and investor concerns over credit,” said Jill Carey Hall, U.S. equity strategist at Bank of America.
This sharp exodus follows the sudden bankruptcy of auto parts supplier First Brands, which has raised red flags about credit risks in the booming but opaque private credit market.
Analysts at Bank of America, including Ebrahim Poonawala, described the event as a potential “canary in the coalmine.”
"Given the strong run in bank stocks YTD (especially the largest banks), we are not surprised to see a reassessment among investors," said Poonawala, adding that questions are growing about whether financial stocks are ignoring downside risks.
What’s Really Behind This Selling?
Several layers of concern are stacking up.
The job market is showing cracks, with the latest private sector reports confirming cooling labor market conditions in September despite the absence of official data due to the government shutdown.
At the same time, the bankruptcy of First Brands has reignited concerns around credit quality and the exposure of banks to non-bank lenders.
This comes as investors grow increasingly cautious about the rapid expansion of private credit markets, which have seen a surge in bank lending in recent years.
Although Bank of America, based on conversations with nearly 40 U.S. and Canadian banks, says that credit conditions currently appear "relatively benign," the focus is clearly shifting toward potential spillover risks that may emerge in the quarters ahead.
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