There’s a hot new hedge fund hotel

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George Soros, the bete noir of certain unhinged fantasists and a handy money manager in his day, once famously said that when he saw a bubble forming he didn’t avoid it. “I rush to buy, adding fuel to the fire”.

Completely coincidentally, here are the top constituents of Goldman Sachs’ “Hedge Fund VIP basket”, an index of the biggest positions reported by about 740 hedge funds with $2.2tn of gross assets.

Nvidia only made it into the VIP list in the third quarter of 2022, and at the beginning of the year was only the 12th most popular bet. It was still only seventh at the end of the first quarter of 2023. Someone’s been buying hand over fist.

And here is a chart of Nvidia’s share price over the past few years. The chipmaker has rallied 188 per cent in 2023 and now trading at almost 20 times expected revenues, according to Refinitiv data (that’s revenues).

Even that multiple is flattered by some hefty analyst expectations for how quickly Nvidia will grow. It is trading at over 40 times its trailing sales, and 220 times earnings.

Look, the excitement about AI makes sense. It’s exciting stuff! And trying to find out who is going to win from the AI boom is tricky, so why not just invest in the company making the AI shovels — ie chipmaker supreme Nvidia?

Here’s Barclays:

In the near term, we believe that most of economic value will accrue primarily to the foundational hardware and infrastructure layers of the stack (ie, components and cloud hyperscalers), and furthermore, to a handful of key companies within those layers. This is perhaps obvious, as AI remains in the nascent stages of both development and adoption, yet the immense computing power that was required to bring us to even this stage called upon the select few providers that could supply said power at scale. The best example is NVDA, the guidance of which indicates it is capturing nearly all of the near-term AI economics at the component layer.

It’s also hard not to keep hitting a drug that produces such great highs. The rising prominence of Nvidia and its subsequent runaway performance has helped the VIP list beat the broader US equity market this year.

But cmon.

Nvidia has now added nearly $700bn of market capitalisation in just over half a year — almost the equivalent of adding an entire Berkshire Hathaway, or two Procter & Gambles. For that you could buy both Coca-Cola and PepsiCo, and still have change to snap up Nike or Disney.

It’s striking that US mutual funds seem far less enamoured. Nvidia doesn’t even appear on the top 50 of Goldman’s equivalent VIP index for mutual funds.

Who knows when it will happen, but it does look like Nvidia — excellent company though it is — is on the way to become another classic momentum-fuelled hedge fund hotel that will eventually collapse in hilarious fashion. There are no stupid investments, only stupid prices.

As Jamie Powell wrote a few years ago, the classic example from the dotcom bubble and bust is Cisco. Similarly to Nvidia, the thesis was that picking the internet winners was difficult, so why not invest in the dominant producer of its physical hardware?

The thesis wasn’t all wrong. Cisco made almost $16bn in the year to July 2022 — almost five times what it banked in 1999 — with a gross profit margin of almost 62 per cent. And yet its share price has still never climbed back to its 2000 peak.