How Fund Managers Think About a Possible AI Correction
The AI boom is driving the markets, but fears of overheating are growing. Traditional hedging strategies are faltering, and professionals are seeking new ways to stabilize portfolios.
Markets Near Record High, Risk Appetite Returns
The S&P 500 is only a few points below its all-time high, and the Nasdaq has also recovered from the November losses. Nevertheless, nervousness remains high. In the monthly Bank of America survey, 45 percent of fund managers name a possible AI bubble as the greatest extreme risk. ECB Vice President Luis de Guindos recently warned of abrupt mood swings.
Many investors do not yet see a speculative bubble. However, the question of how to protect portfolios against a setback is more pressing than ever - and there is no simple answer.
Why Classic Protective Mechanisms Are Currently Weakening
The traditional hedging relies on two assumptions: that stocks and bonds react inversely during periods of stress and that the US dollar acts as a safe haven. Neither is a given in 2025.
In the spring, the dollar fell simultaneously with the US stock market – a pattern break that caused additional losses for euro investors. AGI data shows: The short-term correlation between S&P 500 and the dollar is positive again. If the dollar also falls in the next downturn, it will be worthless as a hedge.
The role of government bonds is also uncertain. In 2022, stocks and bonds fell simultaneously. Although falling interest rates in the event of an AI correction would probably support bond prices, this is not certain, especially if inflation or debt fears dominate.
Gold: Sought-after, but expensive
Many professionals continue to rely on gold – despite the steep price increase of 60 percent since the beginning of the year. AllianzGI strategist Gregor Hirt considers gold a possible stability anchor, others warn. Union Investment no longer considers the valuation justified. LBBW sees little upside potential in a crisis.
DWS and Feri, however, remain convinced that gold works in times of stress. Central bank purchases could drive the price further. Hedging, they argue, costs money.
Cryptocurrencies as a Hedge? More Controversial Than Ever
Some asset managers view Bitcoin as the digital equivalent of gold. Feri sees cryptocurrencies as a natural hedge and points out that the asset class is maturing. But the recent Bitcoin slump suggests otherwise. Dekabank considers crypto a poor protection: Price movements increasingly resemble tech stocks.
Bonds: A Reliable Buffer Again?
If AI euphoria collapses, the Fed might respond with further interest rate cuts. In this scenario, government bonds would rise and regain their old function as a stabilizer. However, Goldman Sachs advises dynamic allocations because the behavior of bonds has become more unpredictable in recent years.
Derivatives experience a comeback
Many professionals rely on options to hedge portfolios. Put options can limit losses, even completely if necessary. The low market volatility currently makes these instruments relatively inexpensive.
There is also growing interest in credit derivatives like credit default swaps. According to Deutsche Bank, hedging costs have increased in the AI sector, as with bonds from Oracle. For many managers, CDS are increasingly serving as a hedge against defaults, should AI-specific risks expand into a systemic problem.
No Perfect Hedge – But Many Building Blocks
The market remains vulnerable to mood swings. Whether an AI correction will come is uncertain. What is clear, however, is that classical protection instruments no longer work automatically. Fund managers, therefore, combine multiple tools – gold, bonds, put options, CDS, and partly crypto – to make portfolios more robust.
