LONDON :Boaz Weinstein's Saba Capital Management has sold credit derivatives in recent months to lenders seeking protection on big tech names like Oracle and Microsoft due to concerns over a debt-financed AI investment frenzy, a source told Reuters. Banks have sought to shield their exposure to potential losses by buying credit default swaps (CDS) from the U.S. hedge fund manager, known for his winning bet against the JPMorgan Chase trader dubbed the "London Whale", the person said.

While the credit insurance rises in value in tandem with the perceived risk of a company's default, current prices indicate those risks are still low compared to other sectors.

Saba sold banks CDSs on Oracle, Microsoft, Meta, Amazon and Google parent Alphabet, said the source, who had direct knowledge of the deals. 

Some large asset managers, including a private credit fund, were also keen to buy the product, the source said.

Microsoft declined to comment. Meta, Google, Amazon and Oracle did not immediately respond to requests for comment.

BANKS SEEK PROTECTION AS TECH FIRMS RACK UP DEBT

The development highlights a scramble to hedge against an explosion in the value of AI companies and their growing debt burdens. It also points to fears that, if the current AI enthusiasm proves to be a bubble, any pop would echo across equity markets as a sharp correction, denting the economy.

The person said it was the first time Saba has sold hedging protection on some of the companies and the first time banks had asked for this kind of trade from the hedge fund.

The finance firms, the source said, were seeking protection against the debt accumulating on companies' balance sheets as they borrow heavily to fund their multi-billion-dollar AI projects.

Equity derivatives trading also saw increased client demand for hedging protection against the sector, a Goldman Sachs client note released on Friday showed.

"Some of this is concern about AI corporate bond supply over the next few quarters after a surprise surge in recent weeks," Deutsche Bank's Jim Reid said in a note on Monday speaking in general about the tech-related CDS market.

"However, it seems that they are also being used as a general hedge for all sorts of positive AI positions."

RISKS LOW COMPARED TO OTHER SECTORS DESPITE BUBBLE WORRIES

While ultimately CDSs are meant to pay compensation if a company goes bust, the derivatives themselves grow in valu...