Why has hedging lagged and what’s ahead?
Amy Wu Silverman: Hedging demand has been underrepresented, largely due to a redistribution of risks. Since Covid, the narrative has been that missing the upside is just as costly as missing the downside. Investors have been heavily weighted to the right tail because of concentration risk, career risk, and the moral hazard of missing that upside.
“Investors have been heavily weighted to the right tail because of concentration risk, career risk, and the moral hazard of missing that upside.”
Amy Wu Silverman, Head of Derivatives Strategy
Now, we’re seeing some toe-dipping as the narrative shifts. Questions around AI and the capex cycle are emerging. When downside demand picks up, it will likely accelerate as markets sell off. Investors are waiting for confirmation of downward momentum. That’s why I call it ‘shadow hedging.’ So far, the bears have been quiet, but they’re getting louder. Hedging is becoming more acceptable as investors look ahead to 2026 risk budgets, and volatility pricing has risen as a result.
Why are big tech CDS at peak levels, and what does it mean for credit markets?
Callie Simpkins: There’s been an onslaught of AI mega deals in the investment-grade (IG) space to fund growth and capex. The challenge is investors lack clarity on returns. They’re essentially buying into a “trust us” story from hyperscalers to absorb this debt.
As these risks shift from equity to credit through pop-up deals, IG investors are effectively long AI exposure. Combined with JVs and private credit partnerships financing off-balance-sheet data center projects, credit risk tied to the AI trade is continuing to build.
As these risks shift from equity to credit through pop-up deals, IG investors are effectively long AI exposure. Combined with JVs and private credit partnerships financing off-balance-sheet data center projects, credit risk tied to the AI trade is continuing to build.
“Scrutiny over the AI theme is rising. Clients are looking for ways to protect themselves, but there aren’t many clean hedges for AI exposure.”
Callie Simpkins, Managing Director, Cross-Asset Hedge Fund Sales
What’s the skew dynamic on the AI trade?
Silverman: The market has rotated away from bulwark-style earnings names as concentration risk makes everything feel like one correlated trade. Within the Mag Seven, call-option exuberance has faded, removing the right-tail tilt that dominated positioning earlier in the year.
A huge part of that shift ties back to retail. Over the past few years, FOMO, MOMO, and even FOMO-YOLO behaviors have become defining forces in the market, a massive tectonic change from five years ago. Retail participation in hyperscalers and call options has historically been one of the biggest drivers of upside momentum, but that interest is largely absent this time. Passive equity flows are plateauing, and margin debt, which fueled retail trades, is leveling off.
Will fading AI enthusiasm turn into a strategic shift for 2026?
Ben Fisher: One factor hurting risk assets is the shift in Fed cut pricing. In October, odds for a December cut were near 10%, but now they’re below 50%. For non-AI sectors, rate cuts and stronger GDP growth are critical. Healthcare has seen a recent uptick, but its S&P weighting remains historically low, so you could argue a long way to go but without rate cuts makes sustained outperformance difficult. Fear of underperforming benchmarks adds both reputational and capital risk for investors, especially if we get another post-Liberation Day rally so set up for Rotation is possible but it will likely require greater confidence in a December Fed cut.
“For non-AI sectors, rate cuts and stronger GDP growth are critical. Rotation is possible, but it will likely require greater confidence in a December Fed cut.”
Ben Fisher, U.S. Equity Sales, Midwest & Macro Sales Specialist
Simpkins: The next major tell for December comes from how hawkish the Fed appeared at the October meeting, which we’ll see in the FOMC minutes. That commentary will shape whether markets lean toward a cut or a pause. Depending on how the Fed frames the labor backdrop, a December move could either provide support for risk assets or add to the downside pressure that’s been building. The Beige Book’s qualitative insights will also be a critical data point.
Why has hyperscaler issuance faced little pushback?
Simpkins: These deals are getting done in both public and private markets, including data center JVs and private credit. There’s plenty of dry powder and firms are eager to deploy capital in this space. Hyperscalers are massive companies generating strong revenue and cash flow, so investors are comfortable pricing these deals. The name causing angst in credit markets is Oracle, which isn’t in the same tier. Its massive issuance has backed up the IG market.
Is the focus in credit moving from AI to consumer and cyclical risks?
Simpkins: Consumer fears are definitely topical and top of mind. There were fraud concerns which spooked investors ahead of bank earnings. People worried delinquencies and charge-offs would be a major theme, and while they largely weren’t, those credit and consumer fears were ring-fenced rather than resolved. There’s still lingering angst. Cyclical names have also been tough across chems, autos, and housing. So, there are real concerns, which is why the December Fed decision is so critical.
Fisher: At this conference, those themes are very much present. There has been a lot of talk about a K-shaped economy, with delinquencies rising on the low end while the high-end consumer continues to hold up. From an AI perspective, I haven’t seen any real fundamental concerns, so it feels more like a sentiment issue. But as you know, sentiment can create a lot of pain for longer than fundamentals might suggest.
“From an AI perspective, I haven’t seen any real fundamental concerns, so it feels more like a sentiment issue.”
Ben Fisher, U.S. Equity Sales, Midwest & Macro Sales Specialist
