Over the past six weeks, two of Asia's most prominent hedge funds—Gengxi Capital and Hunjin Capital—have quietly shed positions in optical communication and advanced packaging stocks, the very hardware that powers AI's exponential growth. Gengxi's flagship fund, which returned 164% through May, now warns that the rally may be unsustainable. Hunjin, which rose a third in the first five months, has sold outright, citing 'the magnitude and speed of the surge.' The signals are familiar to anyone who watched the ICO mania of 2017 or the Terra collapse of 2022: the smart money is not betting against the technology, but it is betting against the price.
This is not a story about AI. It is a story about the lifecycle of narrative-driven markets, and the ethical obligation of those who build in them. As a Web3 community founder who has watched similar patterns play out in crypto—from the liquidity drama of DeFi summer to the L2 fee spike after Dencun—I recognize the quiet shift in posture. Funds that rode the wave are now scanning for exit triggers. They have identified 'specific triggers' that would prompt a broader sell-off, though they have not yet pulled that lever. The infrastructure narrative—optical modules, CoWoS packaging, GPU supply chains—is still supported by real earnings, but the price has outrun the fundamentals. We have seen this before. We will see it again.
The Core Insight: Infrastructure vs. Application
The hedge fund retreat reveals a deeper structural truth: in the current AI cycle, the only clear commercialization has been in the hardware layer. Optical communication companies like Zhongji Innolight posted net profit growth of over 100% in 2024. Advanced packaging foundries are running at full capacity. Yet the model layer—the large language models, the AI agents, the generative applications—remains largely pre-revenue in the public markets. Funds are not selling AI itself; they are selling the idea that the infrastructure rally has more room to run.
This mirrors a pattern I observed while auditing the tokenomics of OmniChain in 2017. Back then, the narrative was that decentralized identity would revolutionize global finance. But when I dug into the distribution model, the early investor allocation contradicted the egalitarian rhetoric. The project rug-pulled months later. The lesson: when the most transparent part of a stack (infrastructure) becomes overvalued, it is often because the less transparent parts (applications) cannot yet sustain the narrative. Funds are not fools—they read the whitepapers, they see the user numbers, and they rotate.
In crypto, we saw this with the L2 liquidity mining mania of 2023. Projects like Arbitrum and Optimism offered massive incentives to attract TVL, but the actual transaction volume on those chains—measured by daily active users and gas consumption—did not grow proportionally. Post-Dencun, blob data volumes are surging, but my analysis suggests that within two years, blob space will be saturated, and rollup gas fees will double. Funds that loaded up on L2 tokens based on TVL narrative alone are now quietly rotating into more capital-efficient plays. The same principle applies: if the infrastructure (L2 sequencers, data availability layers) is overpriced relative to the usage it facilitates, the sell-off is not a bug—it is a feature.
Contrarian Angle: The Stewardship Signal
The contrarian take, one that many will ignore, is that this retreat is not a vote against AI or crypto—it is a vote for quality. When funds cut positions in optical communication and advanced packaging, they are not saying the technology is failing. They are saying that the price has disconnected from the underlying economic activity. In my experience managing The Alignment Circle in 2024, the builders who survived the bear market were not those who raised the most capital, but those who built protocols with real governance mechanisms that aligned incentives with long-term value. I mentored 50 core members through DAO structuring, and the ones who focused on transparent treasury management and community-first decision-making are now raising Series A rounds. The ones who chased speculative hype are gone.
This is the same signal flashing in the AI equity markets. The funds that are selling now are the ones who understand that trust is the only protocol that cannot be coded. They are not betting against the technology; they are hedging against the narrative's climax. In 2022, after Terra's collapse, I retreated to a cabin in Yilan and journaled about the human need for trust in digital systems. That isolation taught me that the most dangerous phase of any cycle is not the crash, but the moment when everyone convinced themselves the crash cannot happen. The hedge funds' trigger signals—likely tied to Nvidia's next earnings or a tightening of US chip export controls—are the same as the alarm bells that precede a market top.
Takeaway: Build for the Valley, Not the Peak
We built not for the peak, but for the valley. The next six months will test whether the AI and crypto industries can decouple from their speculative shadows. If the funds continue to sell, and if the real economic activity—on-chain transactions, AI agent subscriptions, compute utilization—holds steady, then we will have a healthier market. If the activity falters, the narrative will collapse entirely. My bet is on the former. The projects that will thrive are those that embed ethical governance into their code, that prioritize regulatory harmony over regulatory evasion, and that understand that trust is a protocol that must be earned daily.
The hedge fund retreat is not a warning—it is an invitation. An invitation to look beyond the price and ask: are we building for the chart, or for the soul? As I wrote in my essay series 'The Algorithmic Soul,' the convergence of AI and crypto will either centralize power or distribute it. The funds are selling the hardware. The builders must buy the vision.
Trust is the only protocol that cannot be coded. And in both AI and crypto, that protocol is being tested right now.
