As financial markets and the broader US economy become increasingly dependent on the health of the artificial intelligence sector, investors are looking for strategies to protect their portfolios from excessive AI exposure.

US equity and credit markets are increasingly concentrated in AI-related companies, and fund managers say they are searching for assets and strategies that are insulated from a sudden shift in sentiment toward the technology.

Research from Citigroup shows that more than two-thirds of large US companies in the Russell 1000 index are either directly linked to AI or connected to it as the technology becomes more embedded in their business models.

Data from JPMorgan shows that large technology "hyperscalers" and beneficiaries of the AI spending boom have borrowed heavily in recent years and now account for about 16% of the US high-grade bond market, making them the largest group in the investment-grade market.

Vincent Mortier, chief investment officer at Amundi, said: "Clients are re-examining the way they need to diversify." He noted that the AI theme is "very powerful," but surprises such as "significant earnings revisions" could shift its direction. "It is not imminent," he said, "but I think it will come."

Ryan Marshall, global head of multi-asset strategies and solutions at BlackRock, said, "Trying to build portfolios that introduce independent, uncorrelated sources of return is absolutely where the demand is right now." He added that one of the challenges facing multi-asset portfolios "is the concentration of AI-related exposure."

"Then there is a second concentric circle, which is its suppliers, potentially related to power, infrastructure and supply chains," he said. "At the same time, we now also have the correlation between AI and overall economic growth."

Marshall noted that "this phenomenon is pushing people toward private asset classes, hedge funds and other lower-correlation areas of the market."

In the hedge fund space, he mentioned "managers who can demonstrate that the return streams they generate are independent of or uncorrelated with broader bond and equity market risk," including managers running global macro and equity long-short strategies.

Mortier also believes hedge funds have become "significantly" more attractive to clients, but "the problem is that the hedge fund universe is very diverse... the challenge is finding the right strategy and the right manager that are still willing to accept money."

He added that clients are also "increasingly considering emerging markets as a whole," including local-currency equities and bonds, such as in Latin America and India.

Another popular route is "a return to some fundamental real assets" where "there is something tangible," he noted, pointing out that "mining is an interesting area" and "renewable energy is also a form of diversification."

Daniel Gamba, co-president and chief commercial officer at Franklin Templeton, said dedicated investment teams are increasingly viewing AI as a return driver, similar to other so-called factors such as value, momentum and growth, in order to build portfolios with "minimal exposure to AI volatility."

He added: "Demand for systematic (hedge funds) is increasing. We can see it ourselves; our systematic business is growing. Demand for AI-related factor diversification is also increasing."

Gamba noted: "We remain bullish on US equities," but "certainly less optimistic than at the start of the year," and "not only concentrated in a handful of companies investing nearly $1 trillion in AI infrastructure."

"We are clearly seeking diversified exposure." He said Franklin is also optimistic about Japan and some emerging markets, while in fixed income it is looking at shorter-duration bonds, "unless people are seeking yield, in which case they are not really taking major interest rate risk at the long end."

Gamba said: "I would say, be careful about your factor diversification risk, and be careful about your company being overly exposed to AI."

"Be slightly more defensive," he added, although he noted that "we do not think anything imminent will trigger a large-scale sell-off."

Still, Mortier warned by citing former Citigroup boss Chuck Prince's famous remarks in July 2007, shortly before the global financial crisis erupted: "We are a bit in that kind of environment today; the music is still playing and people are still dancing."

"The music will stop at some point. But the timing is so hard to predict, which is why diversification is more necessary than ever."