China’s quant funds post their worst week in more than two years on AI-stock reversal

China’s quantitative hedge funds just had their worst week in more than two years as a sharp reversal in AI-linked stocks turned the industry’s most crowded trade against it. The 73 funds built to beat the small-cap CSI 1000 fell an average 14% in the week ended 17 July, Bloomberg reports.

Marquee names took the brunt: A CSI 1000 fund run by DeepSeek founder Liang Wenfeng’s High-Flyer, which oversees more than USD 10 bn, dropped 15.7%. Beijing’s HanTak lost an estimated 16.1%, while BlackWing’s stock strategy shed 19.39%, its steepest fall since launch.

That’s a violent turn for strategies sold as safe. Some of these managers returned north of 50% last year, drawing a rush of affluent investors during China’s property slump and equity malaise. Even before the drawdown, Chinese quants’ average excess return had thinned to 3.5% in 1H — down more than 10 percentage points y-o-y — as the AI rally made diversified books hard to beat.

The damage was crowding: Momentum and beta factors had pushed both traditional and machine-learning models into the same AI-linked small-caps. When overseas chip shares sold off and spillover weakness hit China, fresh inflows dried up and managers rushed for the same exits, with deleveraging deepening the slide, E Tiger’s investment director Li Minghong told Bloomberg. Volatility ran about 50% above last year, and factors that normally offset one another fell together.

Why it matters: This is an early, real-money stress test of the AI-bubble worry markets have been circling and a reminder that “market-neutral” holds only until everyone owns the same book.

What’s next: State-backed buying drove a Tuesday rebound, and the CSRC is signaling tighter scrutiny of quant and AI-linked trading. The near-term risk to watch is earnings from AI companies, where a miss could trigger a broader correction, according to private fund manager Lingjun Investment.

MARKETS THIS MORNING-

Asian markets opened higher this morning, echoing the rebound on Wall Street. South Korea’s Kospi led regional gains with a 6% gain, while Japan’s Nikkei traded up 2% as investors appeared to shrug off concerns over escalating regional war.

THE CLOSING BELL-

The EGX30 rose 1.6% at yesterday’s close on turnover of EGP 13.2 bn (44.3% above the 90-day average). International investors were the sole net buyers. The index is up 29.1% YTD.

In the green: ADIB (+5.1%), E-finance (+4.3%), and Telecom Egypt (+3.8%).

In the red: Raya Holding (-3.3%), Valmore Holding -EGP (-1.5%), and Misr Cement (-1.0%).