Quant Funds Suffer Worst Performance in Nearly a Year Amid AI Stock Selloff

A sharp selloff in high-flying artificial intelligence stocks has dealt systematic hedge funds their worst performance in nearly a year, erasing a quarter of their 2026 gains. The reversal caught many managers in crowded trades, leading to a significant reduction in market leverage, according to a note from Goldman Sachs.

Performance Hit

In a note dated Wednesday, Goldman Sachs reported that systematic managers—also known as quant funds—that rely on algorithms to trade market trends have given back a significant portion of their recent profits. The firm detailed the performance impact from the market volatility that began in late June.

• Year-to-date returns for quant funds fell to +10.8%, down from a high of +14.4% on June 22.
• Fundamental, or stock-picking, hedge funds were down 2.2% over the same period but have maintained a year-to-date return of +15.5%.

Crowded Trades Unwind

The losses stemmed from a rapid unwinding of some of the market's most popular and crowded positions, particularly in the tech sector. Goldman noted that bets against U.S. equities, developed-market stocks in Asia, and to a lesser extent, Europe, contributed to the decline.

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Extreme volatility in chipmaker stocks created a difficult trading environment. According to the note, these market moves were amplified by high levels of leverage among retail investors, particularly in Korean markets. This highlights the risks associated with concentrated positions in popular sectors.

Deleveraging and Market Impact

In response to the downturn, hedge funds have aggressively exited their AI-related trades, many of which had previously been major performance drivers. This mass exit has pushed overall hedge fund leverage down to its lowest level in the last year, signaling a broad-based reduction in risk-taking and trading activity.

The development comes as regulators, including the Bank of England and the Bank for International Settlements, have issued warnings about lofty valuations in the tech sector. They have also voiced concerns over the growing role of hedge funds in financial markets and their potential to amplify volatility.