China's Quant Funds Lost 17% on Average in July; DeepSeek Founder's Product Dropped Over 20%
N.R. Finch
China's long-only quant funds lost an average of 17% in July, with only 4% posting gains — meaning the alpha built up during the first-half AI rally was nearly wiped out in a single month.
How bad was the damage — and who got hit hardest?
Of the more than 1,300 products tracked by Shanghai Suntime, long-only quant funds fell 17% on average in July. Only about 4% finished in positive territory.
All 9 products managed by High-Flyer Asset Management (浙江幻方科技) — the firm of DeepSeek founder Liang Wenfeng — dropped more than 20%. Eight are now underwater for the year; the sole survivor is up just 0.04% year-to-date.
Shanghai Wenbo Investment's 13 products averaged a 21.5% July loss. Its worst single product plunged 42.7% in one month, turning a year-to-date gain into a nearly 30% loss.
Minghong Investment saw 9 of 14 products flip to losses; Ubiquant (鸣石投资) and Yanfu Investments (衍复投资) each had at least one product in the red.
The quant industry's core selling point — how much alpha is left?
Alpha — the return a fund earns above its benchmark — is the whole reason investors pay quant fees. Orient Securities data show that the average CSI 500 enhanced-index strategy trailed its benchmark by 0.85 percentage points through July 31.
This means → over the prior eight years, the same strategy beat the benchmark by an average of 8.9 points per year. This year it is not just underperforming — it is losing. Catching up to even the worst alpha year on record (2024, at 4.3 points) would require a sharp second-half rebound.
Against the CSI 1000, year-to-date alpha stands at just 1.9 points, far below the 19-point average since 2018. In plain terms = the quant industry's "we beat the index" badge is close to meaningless this year.
Why was the drawdown so severe?
AI-related stocks rallied through the first half of 2025. Momentum factors — the part of the model that automatically chases recent winners — steadily increased quant portfolios' exposure to tech names.
When global tech stocks sold off from South Korea to the U.S. in July, Chinese AI plays followed. This means → the very factors that drove first-half gains instantly became the source of losses.
Crowded small-cap positioning made it worse. Many quant funds held the same small-cap names; when they sold simultaneously, the stampede amplified drawdowns. The CSI 1000's near-20% monthly decline captures that crowding effect.
How are investors reacting — and will the money leave?
Li Yi, senior sales manager at Shenzhen Kingfund, said: "Quant attracted the bulk of industry inflows in the first half, but the moment alpha narrows or turns negative, the skepticism comes right back."
He noted that veteran clients have seen this before and remain relatively calm. Newer investors, however, are growing increasingly anxious.
This reflects a deeper question: China's quant industry now manages more than RMB 2.6 trillion (roughly $385 billion). Whether that asset base can hold when alpha stays depressed is the sector's defining test for the second half.
Content is for reference only, not financial advice.