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: TADAWUL-

The TASI fell 0.4% yesterday on turnover of SAR 4.5 bn. The index is up 2.0% YTD.

In the green: Aldrees (+6.3%), Alistithmar REIT (+6.2%), and Gulf Ins. Group (+5.9%).

In the red: Abo Moati for Bookstores (-6.7%), Saudi Enaya Cooperative Ins. (-5.6%), and Takween (-4.9%).

THE CLOSING BELL: NOMU-

The NomuC rose 0.2% yesterday on turnover of SAR 11 mn. The index is down 4.8% YTD.

In the green: Leen Alkhair (+9.7%), Ladun Investment (+8.1%), and National Signage Industrial (+3.5%).

In the red: Time Entertainment (-10.2%), Dar Almarkabah (-8.6%), and Aqaseem Factory for Chemicals and Plastics (-7.7%).