Several hedge funds have recorded their weakest trading performance in nearly a year after being caught in heavily crowded artificial intelligence (AI) and technology trades during a period of heightened market volatility.
Systematic hedge funds, also known as quant funds, have been among the hardest hit, while traditional stock-picking managers have also reduced exposure to AI-related investments as risk appetite weakened.
Quant Funds Give Back a Quarter of 2026 Gains
Systematic managers that rely on algorithmic trading strategies have surrendered roughly one-quarter of their year-to-date gains. Returns for the group have fallen to 10.8% for the year, down from 14.4% earlier in 2026.
Much of the decline came from bearish positions against some of the market’s most heavily traded areas, including U.S. equities, developed Asian markets and, to a lesser extent, European stocks.
AI and Chipmaker Volatility Weigh on Trading Performance
Sharp swings in semiconductor stocks during late June and early July created a challenging environment for hedge funds. Market movements were further intensified by elevated leverage among investors in South Korea, amplifying price fluctuations across the region.
Quant funds accounted for around 10% of the world’s largest hedge funds in 2025, highlighting the growing influence of algorithm-driven investment strategies.
Regulators Continue Warning About Market Risks
Financial regulators, including the Bank of England, the Bank of Japan and the Bank for International Settlements, have repeatedly cautioned that elevated market valuations and increasing hedge fund activity could contribute to greater market volatility and systemic risk.
Stock Pickers Scale Back AI Exposure
Fundamental hedge funds, which focus on individual company selection, declined 2.2% over the same period after being caught in crowded technology trades.
These managers have “aggressively” exited AI-related positions that had previously been among their strongest-performing investments. The broad reduction in exposure has pushed hedge fund leverage to its lowest level in the past year, reflecting the scale of the industry’s recent deleveraging.