RESOLVING THE LEDGER
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See the full story · 1 sourcesAs Nvidia partners with Wall Street firms to mobilize more than $500 billion of third-party capital for AI infrastructure, the increasingly complex financing underpinning the boom is coming under closer scrutiny.
Hyperscalers and their financial backers are turning to bond markets, joint ventures, leases and other structures to fund an unprecedented infrastructure buildout. At the same time, leverage is increasing investors' AI exposure, as hedge funds and other investors use prime brokerage borrowing and derivatives to amplify returns on their bets on the boom.
But the unravelling of AI-focused hedge fund Situational Awareness , after losses on its leveraged equity bets, is heightening concerns over how much is being borrowed, where it sits, how visible it is, and how quickly it could unwind, as market watchers debate whether revenues justify the scale of spending.
Nvidia. How much is being spent on AI infrastructure? Nvidia's plan to develop platforms for AI infrastructure in partnership with Apollo , Blackstone , BlackRock , Brookfield , KKR and Goldman Sachs could involve private asset-like structures and asset-based financing. Nvidia CEO Jensen Huang told CNBC Monday that Nvidia's chips are now an "investable infrastructure asset."
Some tech giants are using joint ventures and other leasing vehicles to borrow money for AI data center spending — without the debt appearing on their balance sheets until the leases begin.
Goldman Sachs analysts estimated that hyperscalers have combined lease commitments for data centers, R&D facilities, offices and equipment of $1.5 trillion, up from about $200 billion five years ago. This includes about $1 trillion of "uncommenced" lease commitments, which are not yet shown in financial statements but will result in future payments.
This "can understate leverage and future liquidity needs as these obligations are eventually recognized and contractual payments come due," Goldman analysts said in the Aug. 6 note.
This surge in debt issuance — including less-visible forms of leverage — is sharpening the focus on whether the eventual returns from AI infrastructure can justify the vast sums being spent.
Lotfi Karoui, multi-asset credit strategist at PIMCO, said the AI capex cycle is, adjusted for inflation, on track to be the largest investment cycle since the 19th-century railway construction.
But the ultimate scale of the buildout remains "deeply uncertain," he said in PIMCO commentary dated Aug. 11, highlighting consensus forecasts that hyperscaler capital spending alone will surpass $1 trillion per year from 2027 onward, "with no clear signs of moderation."
Karoui said that the scale of hyperscalers' borrowing is such that they are diversifying their debt issuance beyond dollar-denominated paper, with issuers tapping euro, sterling, yen, Swiss franc and Canadian dollar markets.
He added that the relative outperformance of euro-denominated bond spreads issued by Amazon and Alphabet , compared with their U.S. counterparts, potentially hints at "demand fatigue" in the dollar market relative to euro-denominated paper.
He warned that the wave of AI-related issuance in the U.S. could see spreads drift higher because of the underperformance of a handful of larger AI-exposed issuers.
Situational Awareness' collapse showed how vulnerable crowded, leveraged AI trades can be to the sharp sell-offs and rallies the sector has seen recently.
The fund was unable to meet a series of margin calls from lenders after its heavily concentrated portfolio — which included names such as SK Hynix and CoreWeave — suffered during a recent tech sell-off and its assets fell from $45 billion to about $10 billion.
Ken Griffin's larger, multi-strategy hedge fund Citadel later stepped in to buy Situational Awareness' publicly listed positions at a discount. SK Hynix and CoreWeave have since rallied.
JPMorgan CEO Jamie Dimon recently told CNBC's Leslie Picker that margin debt is "pretty high," adding that it increases the risk of amplified volatility.
Sahil Mahtani, director of the investment institute at Ninety One, told CNBC that elevated earnings expectations were a more immediate concern than leverage
SK Hynix. He said expectations "of high and rising earnings in the years ahead" were "the main risk" the AI trade posed to markets. "That is primarily an expectations problem rather than a leverage problem," Mahtani said via email.
He said equity concentration is "historically high" in tech-heavy markets, especially the U.S. While that may not be financial leverage, he said the concentration can act like leverage by amplifying market moves when heavily weighted stocks fall.
"The big equity indices are extremely concentrated, and no one thinks anything could possibly derail them," Mahtani added, but warned that a shift from companies buying back shares to issuing more stock could remove a source of support for equity prices just as AI-related valuations are already under pressure.
Mahtani said the Situational Awareness debacle reflected poor risk management, but that its broader impact had been largely contained.
"Its bull run coincided with the unwind of leveraged ETF structures, primarily in East Asia. Many of these structures, particularly the single-stock structures, were only launched in H1 of this year. In that sense, it is a relatively contained case study."
A spokesperson for the Alternative Investment Management Association, the global trade body for the hedge fund and alternatives industry, said leverage was a "core tool" used by hedge funds to boost returns and provide market liquidity.
"The key question is not whether hedge funds use leverage, but whether its use poses a material threat to financial stability. The available evidence does not support treating hedge fund leverage as an inherent systemic risk," the spokesperson told CNBC.
They said that two previous leverage-related ruptures — the collapse of Archegos Capital Management in 2021 and t...
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