AI Selloff Plunges Quant Funds into Worst Slump Since August 2025

Hedge funds, especially those relying on algorithms, are reeling from their steepest losses since August 2025, as a sharp AI-driven selloff caught many off guard in 'crowded trades' across US and Asian equity markets. Systematic managers, often called quant funds, have seen a quarter of their year-to-date returns vanish since June 22, now standing at a modest 10.8% gain for the year from an earlier 14.4%. This dramatic downturn primarily stems from significant bets against highly volatile chipmaker stocks. This recent market instability is deeply rooted in concerns over 'lofty valuations' within the booming tech sector, with regulators worldwide cautioning about inflated prices in companies like Micron Technology and Intel, whose shares soared by around 200% in 2026 alone. The market's skepticism about the sustainability of massive AI capital expenditures, alongside 'hefty levels of leverage' among retail investors, particularly in Korea, amplified these price swings. Even fundamental managers, who typically pick stocks based on company health, reported losses after strategically pulling back from the 'saturated tech sector', though their overall year-to-date performance remains stronger. As hedge funds aggressively cut their exposure, driving leverage to a year-low, the burning question remains whether this is merely profit-taking or a deeper 'AI bubble' correction. With the Philadelphia Semiconductor Index (SOX) falling 4.2% in a single week, investors are closely watching upcoming earnings reports from major chipmakers like TSMC and Intel for any signs of stabilization or further turmoil. This period will test the resilience of both algorithmic and human-led investment strategies, potentially reshaping the landscape of AI-driven market bets for the rest of 2026.