Hedge funds have suffered a sharp setback in recent weeks as crowded artificial intelligence-related trades unwound amid heightened market volatility, prompting many managers to reduce leverage and risk exposure, according to a report by Investing.com.
Systematic, or quantitative, hedge funds have been among the hardest hit. The strategy group has surrendered around a quarter of its gains for the year, with average returns falling to 10.8% from 14.4% after a difficult trading period spanning late June and early July.
Losses were concentrated in positions linked to some of the market’s most heavily owned assets, including US equities, developed Asian markets and, to a lesser extent, European stocks.
The sell-off was exacerbated by sharp swings in semiconductor shares, while elevated leverage among investors in South Korea amplified market moves and made conditions particularly challenging for trend-following strategies.
Quantitative managers accounted for roughly one in 10 of the largest hedge funds in 2025, underscoring the significance of the recent drawdown across the sector.
Fundamental equity hedge funds also struggled, with stock-picking managers posting average losses of 2.2% over the same period as investors unwound popular technology and AI-related positions.
Many discretionary managers moved aggressively to reduce exposure to AI trades that had been among the strongest contributors to performance earlier in the year, highlighting the speed with which sentiment shifted as volatility increased.
The broad reduction in positioning has pushed hedge fund leverage to its lowest level in the past 12 months, suggesting managers are adopting a more defensive stance while reassessing opportunities across equity markets.
The recent turbulence comes as regulators continue to monitor the risks posed by concentrated positioning and elevated asset valuations. Policymakers, including the Bank of England, the Bank of Japan and the Bank for International Settlements, have previously warned that growing hedge fund participation in financial markets could amplify volatility during periods of market stress.
