LONDON (Reuters) – Hedge funds are holding back on their U.S. AI investments as China’s new AI model emerges to challenge U.S. dominance in the sector, according to a Goldman Sachs note. Nasdaq futures fell and tech shares dropped on Monday as the growing popularity of a Chinese discount AI model shook investors’ confidence in the profitability of U.S. offerings.

Last week, hedge funds exited their tech stock bets, a Goldman Sachs note from Friday and seen by Reuters on Monday showed. The data, from Goldman’s prime brokerage desk, covered data from Jan 17 – 24. Bank prime brokerage desks lend to hedge funds and see their trading flows. Hedge funds are also selling U.S. stocks related to the tech industry, including those that would serve as its infrastructure. These power and energy-related companies would benefit from any AI advancements: from data centers fueling AI models to those building charging stations for electric vehicles, said Goldman.

Over the last 12 months, hedge funds have been reluctant to return with conviction to this stock sector after they dumped these stocks in large numbers last year, from June to August, the note added. Total bets, or trade flows, have seen hedge funds over the past year more likely to sell these stocks, many of which would grow in value with a U.S.-led AI boom, the note said. A trader might sell a stock in order to bet its value will decline or to ditch a losing bet.

Those smaller number of hedge funds which have held on to their trades currently have the highest number of long positions in two years, said the research from Goldman Sachs’ prime brokerage desk. A long position bets the value of a stock will rise. Big technology firms have been investing tens of billions to develop better U.S. AI infrastructure after the success of OpenAI’s ChatGPT. OpenAI and Japanese conglomerate SoftBank on Jan 21 each committed $19 billion to fund Stargate, a joint venture to develop data centers for AI in the U.S.

“Competition from global players like the Chinese AI startup DeepSeek has raised questions about the sustainability of U.S. dominance in this sector, despite substantial domestic investments,” said Bruno Schneller, managing director at Erlen Capital Management. Hedge funds seem to be taking a “wait-and-see” approach on the U.S. stocks related to this industry, said Schneller, whose firm invests in hedge funds.

“Large-scale projects like the Stargate AI initiative bring regulatory complexities that are still unfolding. The lack of clarity surrounding the execution and enforcement of these policies keeps many investors on edge,” said Schneller.