DeepSeek Founder's Quant Fund Loses 15.7% as China's AI Stock Bubble Deflates

Liang Wenfeng built his reputation as the founder of DeepSeek, the AI lab that rattled global markets with a cut-price large language model. Last week, his other venture, the quantitative hedge fund High-Flyer, took a hit of its own. A CSI 1000-tracking fund run by the firm, which manages more than $10 billion in assets, fell 15.7% in the week ended 17 July 2026, according to industry data. High-Flyer was not alone. Across China, 73 quant funds benchmarked to the small-cap CSI 1000 index dropped an average of 14% over the same five trading days, their worst weekly performance in more than two years.

The trigger was not domestic. A global selloff in chip and AI-related equities spilled into Chinese markets and hit small-cap stocks with heavy AI exposure, the exact segment where many quant strategies had piled in. The CSI 1000 itself sank more than 12% for the week, its steepest decline since February 2024. Volatility in AI-linked trading spiked to roughly 50% above year-ago levels, amplifying losses for funds that had leaned on momentum and factor models tuned for calmer conditions.

The damage was not evenly distributed but broadly severe. BlackWing's stock strategy fund lost 19.39%, the sharpest weekly drawdown since the fund launched. Beijing-based HanTak fell an estimated 16.1%. These figures sit above the sector average, underscoring how concentrated bets on AI-adjacent small caps turned a broad rotation into a rout for specific managers.

A Reversal of Fortune

The setback is jarring given how recently quant strategies were the toast of Chinese finance. Some managers posted returns exceeding 50% in 2025, pulling in a wave of new capital from investors fleeing the country's prolonged property slump and a listless broader equity market. That momentum has been fading for months: average excess returns for Chinese quant funds thinned to just 3.5% in the first half of 2026, a drop of more than 10 percentage points from a year earlier. Last week's rout accelerated a trend that was already eroding the sector's edge.

Regulators are taking notice. The China Securities Regulatory Commission has signaled it will tighten scrutiny of quant and AI-linked trading strategies, a move that could reshape how these funds size positions and manage risk going forward. The timing suggests Beijing views the episode as more than a one-week blip, treating the concentration of capital in AI-themed small caps as a structural vulnerability worth addressing directly.

Markets found some footing the following Tuesday, 18 July, when state-backed buying helped drive a rebound in Chinese equities. But the bounce does little to resolve the underlying tension: quant funds that thrived by riding the AI trade now face a market where that same trade can unwind just as violently, and where regulators are watching more closely than they have in years.