Bearish Investors Flock to Hedge Against AI Debt Risks—Here’s What They’re Missing

Bearish sentiment is surging as investors scramble to hedge against what they see as a ticking time bomb: artificial intelligence debt. But in their rush for traditional shelters, they might be overlooking the digital escape hatch.

The Rush for Cover

Fear is a powerful motivator. Concerns over unsustainable AI infrastructure spending, opaque financing models, and potential bubble-like valuations have sent a segment of the market running for the hills. Classic defensive plays are seeing inflows as portfolios brace for a potential reckoning.

The Crypto Counter-Narrative

While traditional hedges get all the attention, a parallel story is unfolding. Decentralized finance isn't just sitting this one out. Protocols built for transparency and disintermediation are positioning themselves as the antithesis to the black-box debt piling up in the AI race. The logic? If the risk is centralized opacity, the hedge is decentralized clarity.

Smart money isn't just hiding—it's hedging into systems that bypass the traditional debt machine altogether. Think of it as shorting the old financial infrastructure by going long on the new one. A few savvy funds are already allocating to crypto volatility products and decentralized insurance markets as a direct hedge against systemic tech-sector stress. After all, what's the point of moving your money from one banker's ledger to another's when the system itself is the question?

So, while the bears pile into tired old assets, the real innovation—and perhaps the sharper hedge—is being built on-chain. It's a cynical but common play: Wall Street sells you the fear, then sells you the hedge. Maybe it's time to build your own.

CDS activity rose particularly in September

The financial performance of tech companies has been on a rollercoaster as investors digest earnings reports and anticipate the impact of AI products from companies such as OpenAI, Google, and Anthropic.

Nonetheless, Oracle and CoreWeave have seen particularly sharp rises in CDS trading as they raise large amounts of debt to underpin data center capacity. Trading in Meta-linked CDS also took off after the company raised $30 billion through bond sales in October to finance its artificial intelligence initiatives.

Nathaniel Rosenbaum, an investment-grade credit strategist at JPMorgan, even noted that single-name CDS volumes had increased substantially this quarter, primarily driven by hyperscalers investing heavily in US data centers.

A top executive at a prominent US credit investment firm also agreed with that assessment, saying, “CDS trading in single names has increased markedly, with folks increasingly using baskets on the big tech companies or on Oracle and Meta specifically. How do you protect yourself and create a hedge? The most common way is a basket of technology CDS.” 

However, CDS interest in highly rated US firms was virtually absent early in the year, when tech companies funded AI expansion from their balance sheets rather than debt markets. The market gained momentum once borrowing replaced cash as the main funding source. Meta, Amazon, Alphabet, and Oracle raised $88 billion this autumn, and JPMorgan predicts $1.5 trillion in investment-grade issuance by 2030.

Oracle’s CDS activity has been on the rise

CDS activity around Oracle has jumped sharply this year, with weekly volumes more than tripling and protection costs hitting their highest point since 2009. The company has accumulated more than $100 billion in debt, mostly to finance data centers and AI infrastructure.

Market data indicate that the company’s CDS is at approximately 126 basis points, significantly above the levels of peers such as Nvidia and Meta.

Although the firm’s assets came under heavy pressure this week after the company fell short of revenue expectations, they dropped further on Friday when it delayed at least one data center build.

Benedict Keim, a portfolio manager at asset manager Altana Wealth, noted, however, that although he did not expect Oracle to default anytime soon, he believed its CDS had been egregiously mispriced. His affiliation, Altana, had first entered the CDS trade in early October, citing Oracle’s rising debt and its heavy exposure to a single customer, OpenAI. 

Recently, Wellington’s Brij Khurana also gave his overall take on CDS trading: “Single-name CDS are having a moment.” He added, “There is much more exposure that banks and private credit players have to individual companies. So they do want to mitigate the risk of that. People are looking for insurance on their holdings.”

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