Advances in artificial intelligence (AI) have the power to create huge opportunities for some businesses, while completely disrupting others. A company that can't adapt to the changing environment stands to fall behind or see its products or services made obsolete by tech-driven alternatives.
Leopold Aschenbrenner, a former OpenAI researcher turned AI influencer, aims to use his expertise in the field to identify winners and losers from the development of artificial intelligence. He started a hedge fund dubbed Situational Awareness last year, and it's quickly grown to more than $2 billion in assets under management.
The fund revealed a massive hedge against the entire semiconductor industry in its most recent 13F filing with the SEC. At the same time, Aschenbrenner maintained his biggest position in one chipmaker while adding to his position in another important AI semiconductor stock.
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Taking some chips off the table
The biggest position held by Situational Awareness at the end of the second quarter was 20,441 put contracts on the VanEck Semiconductor ETF (SMH 0.13%). A put contract gives the owner the right to sell 100 shares of the underlying security at a designated price. Its value will increase if the price of the underlying security goes down.
In other words, Aschenbrenner is betting against the semiconductor industry as a whole. And considering the fund is cap-weighted, he's betting more against the biggest companies in the market. Nvidia notably accounts for over 20% of the entire ETF's portfolio. The put options accounted for 27% of the fund's public holdings as of the end of the second quarter.
But Aschenbrenner isn't bearish on every chip stock in the industry. Situational Awareness is also heavily invested in Intel (INTC -2.09%) call options and Broadcom (AVGO 0.19%) stock. The two positions account for a combined 37% of the publicly traded portfolio.
It's important to note that Situational Awareness is a hedge fund. The put options on the VanEck Semiconductor ETF are likely a hedge against the risks the entire semiconductor industry faces, which would negatively impact the fund's next two largest holdings. It's not necessarily a full blown bearish trade on every other semiconductor stock in the industry.
The two biggest opportunities in semiconductors
Situational Awareness established a massive position in Intel calls during the first quarter. Call options give the holder the right to buy shares at the designated strike price, so they increase in value if the underlying security increases in price. Since buying options is usually less expensive than buying shares, it's a leveraged way to invest in expectations for the asset to increase in value.
Intel is best known for its CPUs, which have largely been displaced by GPUs and other chips in data centers specializing in AI training and inference. But one big theme of Aschenbrenner's writing is that developing AI superintelligence is a matter of national security. To that end, Intel could play a key role in the future of AI as the only U.S.-based leading-edge semiconductor foundry.
His thesis has already played out to some degree. The U.S. government agreed to buy a 9.9% stake in the company in late August. The aim of the investment is to prop up the foundry business, which CEO Lip-Bu Tan had said the company could sunset if it fails to get a major customer contract for its next-generation process. It includes warrants for the government to take another 5% of the company at today's price if Intel gives up control of the foundry operations. The deal also coincides with a commitment from Intel to invest $100 billion in U.S.-based facilities.
The investment in Broadcom is a bit more straightforward. Aschenbrenner established the position in the first quarter, adding to it in the second quarter. His thesis seems based around the idea that AI chips will become increasingly specialized by the end of the decade. That means custom silicon will play a bigger and bigger role in AI data centers, and Broadcom is one of the biggest partners for custom AI accelerators.
Broadcom counts four hyperscale customers, including recently adding a new customer -- thought to be OpenAI -- with $10 billion in contract commitments for next year. Management expects its AI chip revenue to accelerate in the fourth quarter and through 2026, driven by growing market share gains from its existing and new customers. It seems like this is yet another thesis playing out for Situational Awareness.
It's important to remember we only have information on the hedge fund's positions as of the end of June. It's now September, and a lot has changed. While the long-term thesis remains intact for both, both Intel and Broadcom have seen their stocks soar on recent developments supporting those theses.
As such, investors will have to pay a premium at this point to buy into either stock. There may be other AI stock opportunities with more attractive valuations at this point, but there are few alternatives based on the investment theses Aschenbrenner laid out. That may be another reason for the big put position on the VanEck Semiconductor ETF.
