Artificial intelligence (“AI”) is a topic permeating throughout virtually all facets of media, especially within financial news. As is often the case, the more immediate impacts of these developments have been observed across public markets. For example, one of the most immediate beneficiaries within public markets has been Nvidia (NVDA), which has been successful in positioning itself as one of the dominant chip providers for generative AI and is now one of the ten largest companies by market capitalization. In contrast, Chegg (CHGG), an online student-focused connected learning platform, represents a clear example of a company whose business model is at risk, with the company guiding analysts towards significant cuts in projected revenues due to the widespread adoption of ChatGPT. Following this announcement, the stock sold off ~50% in a single trading day. In addition to the fundamental underpinnings driving those price movements, in our view, a fair portion of the recent volatility has been driven by the rhetoric surrounding the space. These significant movements in select public equities in the absence of fundamental updates creates a more challenging portfolio management environment, especially across the hedge fund market where managers often aim to neutralize broader market beta and factor risks creating a return stream primarily driven by alpha. We continue to monitor these implications across our hedge fund portfolio, particularly as it pertains to the short side of their portfolios.

Within private markets, one of the most notable areas seeing the most immediate impact from advancements in AI is the venture capital space. As readers of our recent letters are likely aware, venture capital has seen a significant drop-off in deal activity since the beginning of 2022, with rising rates placing pressure on valuations and capital markets activity decreasing meaningfully. While deal activity in aggregate remains at relatively low levels, AI represents one specific vertical that has seen a notable pickup in deal activity in recent months, as managers aim to invest into the most compelling companies and management teams in this rapidly growing niche. This accelerated and significant increase in demand from investors has driven valuations of AI-related businesses to particularly elevated levels in an environment where valuations across the broader venture capital space remain challenged. While it is possible that some of these companies will represent breakout investments, it is also likely that the majority of them will fail to reach their potential, as is the case with most venture capital investments. This reality further reinforces the importance of partnering alongside top-quality managers with deep and pre-existing knowledge of these technologies, as well as a proven ability to partner with and invest in the strongest companies and founders. We remain skeptical of venture managers making their first foray into AI at a time when excitement and valuations are at record highs, and have been pleased with the pragmatic and thoughtful approach our managers have taken to this space thus far.