China Narrows The AI Capability Gap

CHINA NARROWS THE AI CAPABILITY GAP

China's AI capabilities improving over time

This month’s chart illustrates one of the most significant developments in the global technology landscape: the rapid rise of China’s frontier AI capabilities and the narrowing performance gap with the United States. The graph tracks the top-performing AI model from each country between mid 2023 and late 2025. While the United States maintains a slight lead throughout the period, the visual trend is unmistakable: China is accelerating quickly, with breakthrough moments that reshape expectations about global AI competition.

The most dramatic shift occurs in early 2025 with the release of DeepSeek R1, highlighted in the chart. This model marks a turning point not only in China’s domestic AI progress but also in the broader perception of what Chinese companies can achieve under resource constraints. According to the European Union Institute for Security Studies, DeepSeek R1 demonstrated performance on par with leading American models while using far less computing power and dramatically lower training costs, challenging the assumption that semiconductor export restrictions would slow China’s progress. This breakthrough signals a structural shift: algorithmic efficiency and model design have become strategic strengths within China’s AI ecosystem.

Stanford University’s 2025 AI Index report supports the trend displayed in the graph, noting that China has significantly closed the performance gap with the United States, even though the U.S. continues to produce more frontier models overall. Chinese models such as DeepSeek R1 now rank very close to top U.S. systems on independent benchmarks including LMSYS. The chart reflects this convergence clearly, as the red line representing China rises sharply from 2023 onward, narrowing the distance with the U.S. trajectory.

DeepSeek R1’s impact also stems from its unprecedented efficiency. Reports indicate that the model was trained for approximately $6 million, far below the estimated $100 million-plus investment required for models like OpenAI’s GPT-4. This efficiency not only enabled rapid iteration but also disrupted global markets, with U.S. technology stocks experiencing significant volatility following the model’s release. The economic effects reinforce what the chart shows technologically: China is no longer simply following developments in AI but increasingly shaping the competitive landscape.

Beyond individual models, China’s broader AI ecosystem has strengthened in ways that help explain the steep upward trajectory seen in the graph. Chinese companies have embraced open-source development, improving adoption and accelerating innovation cycles. They have also benefited from strong government support, growing domestic talent pipelines, and an expanding volume of high-quality research output. According to Recorded Future’s 2025 analysis, Chinese generative AI models now trail U.S. counterparts by only three to six months, a remarkably small window given earlier expectations and one that aligns directly with the chart’s near convergence by late 2025.

Overall, the chart captures a moment of profound technological shift. While the United States retains a narrow lead in frontier AI models, China’s rapid progress—driven by efficiency, innovation, and strategic investment—has brought the two countries closer than at any previous point. The upward movement of China’s capability line is not just steep; it is indicative of a maturing ecosystem capable of producing globally competitive models despite resource constraints and external pressures. As the pace of development continues, the global AI landscape in 2026 and beyond is likely to be more multipolar, more competitive, and more dynamic than ever before.

Written by Gabriele Casati

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.
© NS Partners Group

When Big Tech Puts the Old Economy to Work

Big Tech Puts the Old Economy to Work: far from a sterile world, data centers smell of dust and diesel

The commonly held image of a data center is that of grey or white rooms packed with IT and telecom equipment, seemingly operating almost autonomously with minimal human presence. In reality, a functioning data center does indeed look much like this.

Before the white room: the construction site

Yet another reality lies behind this image: one of massive construction works that can be likened to large-scale public infrastructure projects. We typically associate public works with major infrastructure developments commissioned by state or local authorities — roads, sanitation systems, railways, utilities networks, and many others.

At first glance, the construction of a data center does not fundamentally differ from such large infrastructure projects, except for one key aspect: financing. The exceptionally deep pockets of major technology players allow them to undertake these colossal investments through their vast cash-flow generation and borrowing capacity, without recourse to public funds. This represents a fundamental shift in the traditionally accepted order: private companies, through data center projects, are now commissioning a wide range of private and public contractors, whereas historically it was public-sector contracts that engaged both private and public stakeholders.

To simplify, when a technology leader embarks on the construction of a data center, the process begins with surveyors, geotechnical and environmental engineering firms, lawyers, energy consultants and architects. This is followed by project managers, inspection bodies, safety authorities and notaries. Then come the main construction phases: earthworks, civil engineering, structural works, secondary works and technical trades — excavation, foundations, steel structures, waterproofing, electrical systems, generators, cooling, fire detection, cabling and fiber optics. The list is extensive.

Insatiable energy needs

Even before a single server or IT component is installed, a data center will already have generated significant activity for players from the “old economy.” Once operational, this contribution continues. Electricity consumption — regardless of its source — is an obvious necessity, as the reliability of energy supply is the top priority for any data center. The requirements of these giants (often exceeding 200,000 square meters) are immense, typically around 100 MW or more, and must be met without fail.

Unexpected partners

Several companies that might seem unlikely beneficiaries of IT-related projects are now enjoying strong tailwinds. Utilities are one example, as are manufacturers of HVAC (Heating, Ventilation and Air Conditioning) systems. But let us focus on a more surprising case: Cummins, a U.S. specialist in heavy-duty engines (for agricultural and mining equipment, trucks, ships and generators), a company in which NS Partners has been invested for many years.

While Cummins benefits indirectly from data center construction through engines used in construction and mining equipment, it is a very direct beneficiary of the critical need for highly reliable backup generators. Cummins — like Caterpillar — has decades of operational history in this type of engine technology, allowing it to offer immediate, time-tested solutions. For mechanical enthusiasts: the backup generator is a 95-liter diesel engine, capable of starting in under 20 seconds and delivering continuous power of 2.5 MW.

The acceleration in data center construction has therefore very likely contributed significantly to the company’s remarkable share price performance (+115%) over the past two years, even though it remains, in essence, an indirect player.

A trickle-down effect benefiting the entire economy

Cummins is not an isolated case. It illustrates the highly virtuous trickle-down effect that the current data center investment cycle is having on the real economy. Moreover, at this stage, financing does not appear to be a constraint, given the colossal resources available to technology giants to pursue their ambitions.

While major global equity indices may look expensive today, they are nonetheless supported by a productive investment cycle whose effects extend far beyond the technology sector — and crucially, without reliance on public funding. This is something to welcome.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

August general market comments

“(Everybody Wanna Get Rich) Rite Away” – Dr John, 1974.

As August 2025 draws to a close, the financial markets are dancing to the frenetic beat of Dr. John’s “(Everybody Wanna Get Rich) Rite Away,” a funky anthem that captures the universal itch for quick wealth. This month, that rhythm pulsed through global equities, with the Shanghai Composite Index surging nearly 20% from its early August low, adding almost a trillion dollars in market value despite China’s economic headwinds, tariffs, a property slump and persistent deflation.

The S&P 500, meanwhile, pushed past 6,400, riding a 60%+ rally since October 2022, fueled by AI hype and Fed rate cut optimism. It’s a bull market on steroids, but the lyrics’ warning – “If you wanna be rich and you wanna be wealthy, I believe I’d rather be poor and healthy”- echo a growing unease. The rush to riches is evident in China’s 2.1 trillion yuan in margin debt, nearing the 2015 bubble peak and US tech stocks’ outsized gains, reminiscent of the dot-com frenzy. Volatility spiked early in the month, with the VIX jumping to 30 on August 5, reflecting investor jitters beneath the rally’s surface.

Central banks and policymakers tout stimulus and soft landings, but the relative disconnect from fundamentals, flat consumer prices in China, slowing US earnings growth -suggests a speculative bubble inflating alongside this bull run. Dr. John’s swampy groove reminds us that chasing instant wealth can lead to a “racka tacka tacka rum-dum game,” where very few win if sentiment sours. Caution, not just celebration, is the order of the day as September looms.

In a month marked by the end of the Q2 earnings season, which was good but not upbeat, the MSCI World added 2.5%, the S&P 500 1.9% and the MSCI Europe 0.7%. Big advances were recorded in Japan (+4.5%) and China (+10.3%). With looming rate cuts from the Fed, the dollar lost 2.3% versus the euro, US 10 year yields hovered 15 bps lower, and Gold, Bitcoin and Oil soared 4.8%, 8.3% and 6.4% respectively. The renewed political uncertainties linked to France’s very poor budget and debt situation probably limited the euro’s rise, but no panic visible so far: year to date, French 10 year yield is up 33 bps, similar to Germany (+35 bps). Still, France borrows more expensively than Greece now, which was unthinkable some years ago.

Credit fared well, but spreads are ultra-low all across fixed-income credit instruments, leaving little room for further tightening.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Chart of the month: Bubble or Bull? Why not a Bubbull?

Bubble or Bull? Why not a Bubbull?

The current mindset in the investment community is rather binary when it comes to the S&P 500. Either people speak about a bubbly market about to collapse, or about a steady and strong-footed bull market thanks to the AI cycle.

It is honestly difficult to bet the farm on the first or on the latter. US equities, and consequently global equities, as the US makes up roughly 70% of the MSCI World, are supported by impressive profit growth from its leaders, almost all technology related. At the same time, the strong performance recorded by the S&P 500 came with a significant increase in valuations, which are now close to the highest levels of the last 25 years, and getting closer to the late 90s tech bubble.

We, at NS Partners, are as torn between optimism and skepticism as the other market participants. The merits of the big Information Technology leaders and their exposure to AI are undeniable; likewise, their immense profit and cash-flow generation are nothing short of impressive. But, at the same time, valuations matter; they always did and will always do. And today valuations are very demanding; not outrageous, but very demanding. And we see many signs of speculative positioning all around the place, like the lofty returns posted by numerous non-profitable businesses.

The chart of the month shows 100 years of history for the S&P 500. If the latter might appear overextended at this point, reflecting its spectacular run of the last 10 years, it is by no means a call for a fall. The pattern was quite similar in the mid-90s, right before it literally shot up to the upside before the infamous tech bubble finally burst. Being absent from equities back then, before the collapse, was very painful.

We must admit visibility is very limited at this point. The bull market is here and well alive, while we witness flashing lights as we observe multiple bubbly signals in the current environment. A bubble and a bull? Let’s call this a Bubbull for now…

July general market comments

“Electric Avenue” – Eddy Grant, 1982.

The world is charging down “Electric Avenue,” fueled by a surging demand for electrification. Artificial intelligence and sprawling data centers crave vast power to process and store the digital revolution, lighting up the global grid. Emerging markets are plugging into this current, electrifying homes and industries to leap into modernity. Electric vehicles are rolling off the line, their batteries humming with energy, reshaping transportation worldwide. HVAC systems, vital for comfort in a warming climate, draw more juice to cool and heat our spaces. From factories to cities, the rhythm of electrification beats stronger, echoing Eddy Grant’s call to “move to the left, move to the right” with sustainable innovation. Renewable sources like solar and wind are stepping up, yet the strain on infrastructure grows.

Yes, the world turns even more electric, as markets do: in a month of quarterly earnings reports, equities fared quite well and greed was felt all along the way. Safe havens like Gold or long term Government bonds were weak (first down month for Gold in 2025, but a shallow negative 40 bps), while one of the most speculative assets, Bitcoin, soared by 8.3%.

The MSCI World added 1.2%, the S&P 500 2.2%, the Stoxx 600 0.9%, and Emerging Markets 1.7%; Growth regained the lead with a +2.1% advance for the MSCI World Growth (+0.3% for Value), while Defensives in general had a poor month, contrarily to Cyclicals, among which Electricity and Energy Efficiency players shone.

The dollar showed some signs of rebellion, rising 2.9% and 4.5% respectively versus the Euro and the Yen, and Credit posted another solid return (+1.1% for the Itraxx Crossover, which is now up 5.1% year to date).

With tariffs heavily impacting currency markets and earnings and guidance driving equites, we witness wild moves all over the place; it is remarkable, for example, that the S&P 500 has caught up with the Stoxx 600 on a year to date basis (not adjusted by foreign exchange rates), thanks to the powering ahead of the usual suspects, namely big tech stocks that are absent from European markets.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS PARTNERS SA provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data or other financial instruments referred to in this general comment. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Mahjong China Fund: Business Lunch in Lugano, 2 July 2025

Mahjong China Fund: Navigating China’s New Landscape

Business Lunch – Grand Café Al Porto, Lugano – 2 July 2025

Earlier this week, we hosted a private lunch presentation at the historic Grand Café Al Porto in Lugano, bringing together professional investors to explore China’s evolving macro environment and discuss how we position to capture opportunities through our Mahjong China Fund.

Key takeaways from our recent trip to Asia

Following more than 30 meetings in Hong Kong with leading hedge fund managers focused on China and the broader region, we came back with a few clear insights:

Shifting focus to domestic drivers: Managers are increasingly tilting portfolios from export-led themes to domestically driven opportunities across consumption, technology, and industrials.
AI and tech acceleration: Accelerated AI adoption in China, underpinned by both government initiatives and private sector investments, is a top area of conviction.
Selective property exposure: While the property sector is still digesting structural adjustments, selective managers are positioning for a recovery in tier-1 cities.
Active hedging & volatility management: Increased use of derivatives to navigate tech concentration risks and market volatility.
Capital flows turning positive: Local investors, corporate buybacks and a gradual return of international flows are stabilizing markets.
Valuations remain compelling: Many high-quality Chinese companies continue to trade at significant discounts versus global peers, offering a fertile hunting ground for active managers.

Why Mahjong China Fund now?

In this complex backdrop, we believe the Mahjong China Fund provides a highly differentiated way to access China’s equity markets. Unlike traditional long-only or passive vehicles, our approach leverages local long/short managers with deep on-the-ground expertise, capable of navigating dispersion and managing downside risks.

Since its inception on 31 March 2021, the Fund has delivered a cumulative return of +8.5%, significantly outperforming the MSCI China Index (-32.2%), with less than one-third of the volatility.

Our concentrated portfolio of 10-15 managers blends variable net, low net, and long-biased strategies — aiming to capture approximately two-thirds of the upside with only one-third of the downside.

This makes the Fund an attractive diversifier within a global equity or emerging markets allocation, especially for investors seeking controlled volatility and strong risk-adjusted returns.

Learn more

For more information about the Fund, including the prospectus and legal documentation, please reach out to our NS Partners representative or visit our website at preprod-nsp.notzstucki.website/.

Marketing communication. For professional/qualified investors only. Past performance is not indicative of future results.

Mahjong China Fund: Business Lunch in Lugano, 2 July 2025

Mahjong China Fund: Navigating China’s New Landscape

Business Lunch – Grand Café Al Porto, Lugano – 2 July 2025

Key takeaways from our recent trip to Asia

Following more than 30 meetings in Hong Kong with leading hedge fund managers focused on China and the broader region, we came back with a few clear insights:

Shifting focus to domestic drivers: Managers are increasingly tilting portfolios from export-led themes to domestically driven opportunities across consumption, technology, and industrials.
AI and tech acceleration: Accelerated AI adoption in China, underpinned by both government initiatives and private sector investments, is a top area of conviction.
Selective property exposure: While the property sector is still digesting structural adjustments, selective managers are positioning for a recovery in tier-1 cities.
Active hedging & volatility management: Increased use of derivatives to navigate tech concentration risks and market volatility.
Capital flows turning positive: Local investors, corporate buybacks and a gradual return of international flows are stabilizing markets.
Valuations remain compelling: Many high-quality Chinese companies continue to trade at significant discounts versus global peers, offering a fertile hunting ground for active managers.

Why Mahjong China Fund now?

Since its inception on 31 March 2021, the Fund has delivered a cumulative return of +8.5%, significantly outperforming the MSCI China Index (-32.2%), with less than one-third of the volatility.

Our concentrated portfolio of 10-15 managers blends variable net, low net, and long-biased strategies — aiming to capture approximately two-thirds of the upside with only one-third of the downside.

This makes the Fund an attractive diversifier within a global equity or emerging markets allocation, especially for investors seeking controlled volatility and strong risk-adjusted returns.

Learn more

For more information about the Fund, including the prospectus and legal documentation, please reach out to our NS Partners representative or visit our website at preprod-nsp.notzstucki.website/.

Marketing communication. For professional/qualified investors only. Past performance is not indicative of future results.

China’s growth 2025: The dragon awakens

Hedge funds are betting on AI, tech and local consumption to tap into China’s renewed growth.

A renewed sense of optimism among fund managers

Is 2025 finally the turning point for Chinese markets? After several years of painful adjustments, positive signals are starting to align. In Hong Kong, hedge fund managers are becoming increasingly constructive. During a recent trip to Asia, we met with over thirty managers focused on Chinese markets and they all shared a similar view: both top-down and bottom-up conditions are improving.

Strong earnings rebound in Chinese companies

What’s driving this shift? A clear policy pivot from Beijing in September 2024 marked the start of stronger support for the economy and markets. The result: a robust earnings rebound in Q1 2025. BYD reported a 98% increase in EPS, SMIC posted +162% growth in net income and Xiaomi +64%. In a market where corporate earnings serve as a proxy for the macro picture, these numbers speak volumes.

Domestic consumption remains a key challenge

The key domestic driver remains consumption, still below its pre-COVID potential. The government is trying to boost demand with widespread discounts, reaching up to 20% on certain goods. Yet, with employment still under pressure, a sustained rebound in consumption will be hard to achieve without a recovery in the job market.

Real estate: confidence returns, slowly

The real estate sector, long the epicenter of the crisis, appears to have bottomed out. In cities like Shanghai, some new developments are seeing price increases of up to 10%. Some funds are taking this opportunity to re-enter the space via property management companies, seen as more resilient and better positioned to benefit from China’s new housing quality standards.

Sector rotation toward the domestic market

In response to this changing landscape, portfolios are shifting. The dominant trend is clear: a gradual exit from export-driven names and a renewed focus on domestic demand beneficiaries. Consumption, technology (particularly TMT), industrials and AI are leading this sector rotation.

AI in China: ambition, capital, and sovereignty

China’s technological acceleration is striking. AI has become a strategic national priority. Alibaba announced a USD 53 billion investment in AI and cloud and Tencent is following a similar path. The push for tech sovereignty is also visible in the semiconductor sector, where managers are identifying opportunities across the value chain, from chipmakers to materials and equipment providers.

Tech and EVs at the forefront

Digital giants like JD.com, Pinduoduo and Meituan remain core holdings, benefiting from China’s market depth, rapid digitalization and the government’s renewed support for private platforms. The EV sector, driven by players like BYD, NIO and Xiaomi, is thriving at the intersection of China’s climate goals and rising consumer appetite for premium products.

Hedge Funds adapting to volatility

Lastly, Hong Kong-based hedge funds are increasingly using derivatives to manage exposure and volatility. After diversifying into other Asian markets and the US, many are now reallocating substantially back into China. The underlying belief: despite ongoing uncertainties, China’s fundamentals are once again turning attractive.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

AI is transforming systematic quant investing

AI Is Transforming Systematic Quant Investing

Its impact is profound across all fronts: markets, operations, talent requirements and the financial ecosystem.

As artificial intelligence evolves from a mere auxiliary tool to a central decision-making component, the landscape of systematic quantitative hedge funds finds itself at a critical crossroads. This transformation carries far-reaching implications, not only for market dynamics and fund operations but also for talent requirements and the broader financial ecosystem.

Will more efficient markets eliminate alpha?

As AI becomes ubiquitous within quant funds, markets are likely to grow increasingly efficient, reducing the number of pricing anomalies that hedge funds traditionally exploit. These systems are capable of processing vast volumes of data and identifying subtle patterns at unprecedented speed, thereby quickly arbitraging inefficiencies that once produced alpha. The more funds deploy similar AI methodologies analyzing the same data sets, the faster such opportunities will vanish. The result? A scenario where thousands of ultra-powerful computers compete over ever-diminishing slivers of profit.

This accelerated erosion of alpha is fueling a technological arms race, where competitive advantage increasingly hinges on either superior AI capabilities or access to exclusive data sources. Funds lacking cutting-edge AI infrastructure will find themselves at a significant disadvantage, potentially triggering consolidation in the industry as smaller players struggle to maintain performance.

A systemic risk: homogenization

However, the widespread adoption of AI in quantitative funds also introduces new forms of systemic risk. When many funds rely on similar algorithms trained on overlapping data sets, they may respond in the same way to market events, thereby amplifying price movements and potentially triggering flash crashes or liquidity crises. This herd-like algorithmic behavior could increase correlation between ostensibly diverse strategies, undermining the portfolio diversification sought by institutional investors. Are we on the verge of automating financial crises with surgical precision?

Unlike human decision-making, which naturally varies, AI systems could converge on optimal solutions, creating dangerous uniformity in market positioning. This homogenization represents a novel form of systemic vulnerability that regulators and risk managers are only beginning to understand.

Wanted: new talent profiles

The rise of AI in quant funds is redefining talent requirements. Traditional quantitative profiles, mathematicians and physicists with financial acumen, must now be complemented or replaced by AI specialists, machine learning engineers and data scientists. This shift presents both opportunities and challenges for the industry’s workforce.

Furthermore, hedge funds will increasingly compete with tech firms for top AI talent, likely pushing compensation even higher for individuals with both machine learning expertise and a solid grasp of financial markets. Simultaneously, certain traditional quant roles may become obsolete as AI systems take over modeling and strategy development tasks previously handled by humans.

Data as a competitive edge

In an AI-dominated environment, proprietary data will become an increasingly valuable asset. Funds will invest heavily in unique data sources: alternative data, private information or novel combinations of existing datasets that provide a competitive edge. This emphasis on data exclusivity may lead to acquisitions of data providers and investments in proprietary data collection infrastructure. What were once mere commodities (data) are transforming into scarce resources.

Looking ahead, successful funds will be those that excel not only in data acquisition but also in preprocessing, feature engineering and quality assurance, producing clean, structured inputs that maximize AI performance. The ability to turn raw data into machine-learning-ready formats will be a critical source of competitive advantage.

Major regulatory challenges ahead
In a hedge fund landscape increasingly shaped by AI, regulators will face significant challenges. Traditional risk management and disclosure frameworks may prove inadequate for supervising complex, adaptive AI systems whose decision logic continuously evolves. Issues such as algorithmic transparency, explainability and fairness will become increasingly important regulatory concerns.

Moreover, as AI systems become more sophisticated, pinpointing responsibility for market disruptions becomes more difficult. Was a flash crash the result of a coding error, faulty data or emergent AI behavior? These questions will greatly complicate regulatory oversight and accountability.

More than a technological shift, a structural overhaul
The rise of AI in systematic quant investing is not merely a technological upgrade, it represents a fundamental restructuring of financial markets. While it may enhance efficiency and unlock new sources of alpha, it simultaneously introduces novel risks and challenges. Funds, investors and regulators must rapidly adapt to this new paradigm, where competitive advantage is increasingly derived from AI capabilities, data exclusivity and the human expertise needed to operationalize both effectively.

In the meantime, one must ask: should we celebrate the fact that humanity is entrusting its financial system to algorithms that even their creators do not fully understand?

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request. © NS Partners Group

Chart of the month: From safe haven to power play: the Swiss market unleashed

From safe haven to power play: the Swiss market unleashed

Switzerland is globally renowned for its breathtaking landscapes, world-class ski resorts, and prestigious watchmaking industry. However, beyond its scenic beauty, Switzerland boasts world-leading companies in niche industries and stands as a safe haven with untapped potential. It offers a compelling opportunity for investors seeking stability and long-term growth, supported by resilient market fundamentals and a strong economic framework.

In recent years, investors have heavily concentrated their portfolios in the U.S. technology sector, particularly in the “Magnificent 7.” However, the recent AI-driven “red wave” has highlighted the risks of overconcentration. The market’s reaction to DeepSeek’s debut served as a stark reminder of how quickly sentiment can shift, underscoring the importance of diversification. In this context, Swiss equities present a compelling opportunity. Known for their strong balance sheets and earnings growth, Swiss companies provide exposure to high-value niche industries. The Swiss market, by nature, has shown a defensive character over time, with key sectors including consumer staples, insurance, utilities, and pharmaceuticals accounting for more than half of its market composition. Post-DeepSeek turbulence, the Swiss market’s defensive qualities shine even brighter.

Since the beginning of the year, Swiss indices have outperformed global peers, with the Swiss Market Index posting impressive gains of 8.59% in January. Demonstrating resilience on January 27th. Adding defensive position remains a time-tested strategy, amid persistent volatility and uncertainty in global markets. Swiss blue chips such as Nestlé, Roche, and Novartis continue to serve as cornerstone holdings for stability-focused portfolios. However, the true opportunity may lie beyond these household names. While large-cap Swiss stocks attract the most attention, mid-cap companies represent a largely untapped growth avenue. Mid-caps, often in their expansion phases, offer significant growth potential backed by strong fundamentals. That said, careful valuation assessments are essential to mitigate risks related to liquidity constraints and premium pricing.

Recent market movements have not disrupted the positive trajectory of several Swiss stocks, with double-digit gains in key names such as Cie Financiere Richemont, Logitech, UBS, Roche, and Partners Group. But also, gems like Galderma, Sandoz Straumann, Swissquote, Comet, Sulzer and Belimo.

Switzerland’s monetary policy remains supportive of economic growth. The Swiss National Bank is likely to maintain a dovish stance, with the potential for lower or even negative interest rates. Such a policy environment provides an additional tailwind for Swiss equities, particularly for export-oriented firms.

For investors seeking a blend of diversification, stability, innovation, and growth, Swiss equities offer a compelling solution. In today’s unpredictable market environment, having a solid Swiss allocation may not just be a luxury—it might be a necessity.

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