Spreading concerns over big tech credit risk... Wall Street looking for ‘insurance’ amid AI investment craze

(New York = Yonhap News) Correspondent Soo-jeong Lim = With trillions of dollars of funds pouring into the artificial intelligence (AI) industry, there is a growing movement on Wall Street to prepare for a sharp decline in the prices of AI-related investment assets.

As doubts grow over whether profits commensurate with the enormous investment can be achieved, there is a demand to prepare for losses resulting from not only falling stock and bond prices but also falling AI semiconductor (GPU) usage fees.

The Wall Street Journal (WSJ) reported on the 31st of last month (local time) that individual investors and technology company executives who invested in AI-related companies are preparing for investment losses by using put options and credit default swaps (CDS).

Stephen Solaka, senior vice president of investment advisory firm Gateway Investment Advisors, said, “There is a very large demand to protect against losses due to falling investment asset prices.”

He said that in particular, investors who have made significant profits by investing heavily in stocks of large technology companies have recently shown interest in preparing for a decline in the value of their stocks.

As the stock prices of some AI companies have recently plummeted, investor anxiety is growing.

Intel's stock price plunged 28.6% on the 30th of last month, and Alphabet also fell more than 12% the previous day, recording the largest daily drop in history.

Put option trading volume, which bets on a decline in the stock price of Coreweave, an AI cloud infrastructure company, has remained high after surging to an all-time high last month.

In particular, Coreweave put options with an expiration date of 2028 and an exercise price of $35 were actively traded. Coreweave's stock price was trading around $55 last week.

The CDS premium to prepare for the default risk of AI-related companies is also increasing.

The CDS premium is the price of an insurance derivative product in case a company fails to repay its debt, and the higher it is, the greater the market's concern about the company's credit risk.

According to Solve, a bond information company, the CDS premium in case of default by five large technology companies, including Amazon, Alphabet, Microsoft, Meta, and Oracle, has risen in unison over the past month and reached the highest level since 2021.

Eugene Greenberg, co-founder of Solve, said, “The fact that CDS premiums have risen without exception suggests market concerns about the industry as a whole rather than specific credit problems for individual companies.”

New financial products are also emerging to avoid AI investment risks.

High-speed trading company Jump Trading recently began trading derivatives that can reduce losses for data center operators and others if AI GPU usage fees plummet.

Susquehanna International Group, a large trading company, is also receiving inquiries from data center and AI cloud companies about derivatives trading to prepare for the risk of falling GPU usage fees.