Overcrowding threatens ASX AI trade as fund managers pile into small-cap plays

The Australian sharemarket’s artificial intelligence trade is showing signs of severe overcrowding, with fund managers increasingly concentrated in a narrow group of small-cap infrastructure and software companies.

This clustering of positions creates a fragile market structure where a shift in sentiment could trigger a rapid sell-off, according to analysis from the Australian Financial Review.

With limited exposure to large-cap US AI giants, Australian asset managers have turned to domestic "picks-and-shovels" plays to capture the sector's upside.

Companies such as SKS Technologies, Southern Cross Electrical, and GenusPlus have surged in popularity, appearing frequently in top holdings lists.

However, the concentration of capital in these smaller entities means that liquidity can evaporate quickly if major funds attempt to exit simultaneously.

The risk is compounded by a broader supply-demand imbalance in the AI investment landscape.