Big Short 2.0? Deutsche Bank Seeks to Short AI Stocks to Hedge Risks as Market Bubble Shadows Emerge?

As the AI investment craze sweeps the globe, Deutsche Bank has hit the brakes. The Financial Times revealed that the bank is internally assessing hedging risks by shorting AI stocks and engaging in “synthetic risk transfer (SRT)” transactions, indicating that large financial institutions are becoming more alert to the AI asset bubble.

Deutsche Bank considers shorting AI stocks: from financing boom to risk management

In recent years, Deutsche Bank has heavily invested in data center financing to meet the cloud and AI computing needs of tech giants such as Google, Microsoft (Microsoft), and Amazon (Amazon). Recently, the bank even provided over $1 billion in loans to Sweden's EcoDataCenter and Canada's 5C Group, with a total financing scale reaching several billion dollars.

However, with the skyrocketing valuation of AI assets, there have been internal discussions within the financial institution on how to leave an exit strategy amidst AI exposure to guard against the potential risks of asset price corrections.

Dual Hedging Strategy: Shorting AI Stocks Combined with SRT Strategy

To reduce exposure, Deutsche Bank is considering two main hedging methods:

Short a basket of AI concept stocks to gain hedging returns during market corrections.

Engage in “Synthetic Risk Transfer (SRT)” transactions, packaging and selling part of the loan default risk to external investors through derivatives.

It is reported that SRT, as an iteration of “Credit Risk Transfer (Credit Risk Transfer, CRT)”, involves bundling a batch of loans into a “loan pool” and then transferring the “potential default risk” within this loan pool to other investors through derivative contracts. In this way, banks can lend with peace of mind and withdraw completely.

Various measures reflect the banks' desire to maintain their AI layout while also adding a layer of insurance to their balance sheets.

Bubble Alert: Regulatory Authorities and the Market Signal Red Light Together

Recently, the warnings from global regulatory bodies and investors regarding the AI asset bubble have been growing louder.

The central bank of Singapore and the Monetary Authority of Singapore (MAS) pointed out in the latest “Financial Stability Report” yesterday that the valuation of the technology and AI industries is “relatively tight”:

If the optimism about whether AI can generate sufficient future returns wanes, it may lead to a broad and severe correction in the stock market.

Recently, along with disappointing earnings reports from companies like Palantir, AMD, and Meta, the tech sector has generally declined, raising concerns about the major players burning cash to compete in AI.

(OpenAI's valuation soars to $500 billion, renowned investor James Anderson worries about the AI bubble)

Big Short Action 2.0? Michael Burry is the first to short AI

A few days ago, the protagonist of the movie “The Big Short,” Michael Burry, was revealed to have placed a bet against the AI craze through his firm Scion Asset Management.

The declaration documents show that he bought 5 million Palantir put options and 1 million Nvidia put options in the third quarter, with a nominal value of over 1 billion USD. Last week, he just posted a hint that an AI bubble is forming, which also symbolizes that some funds have started to bet that the AI market may enter a correction phase.

( The main character of the big short returns to bearish AI giants: Buy put options on Palantir and Nvidia, warning of a bubble )

Between hot and cold, the probing and vigilance of financial giants.

However, hedging is not easy. The high heat of the AI market keeps the shorting costs high, while SRT derivatives also require a large diversified loan pool and higher returns to attract people to take on risks.

Today, Deutsche Bank's hedging actions are not just the choice of a single institution, but rather a subtle reflection of the overall market sentiment. As AI investments transition from the “golden age” to “reality check,” financial institutions are also beginning to seek balance amidst exposure.

This article Big Short 2.0? Deutsche Bank seeks to short AI stocks to hedge risks, with shadows of a market bubble emerging? Originally appeared in Chain News ABMedia.