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Abstract Introduction We examine whether distinct brain atrophy patterns (using brain parenchymal fraction [BPF]) differentially predict functional performance and decline in Alzheimer's disease (AD), and are independently moderated by (1) a key AD genetic risk marker (apolipoprotein E [APOE]), (2) sex, and (3) high‐risk group (women APOE ɛ4 carriers). Methods We used a 2‐year longitudinal sample of AD patients (baseline N = 170; mean age = 71.3 [9.1] years) from the Sunnybrook Dementia Study. We applied latent class analysis, latent growth modeling, and path analysis. We aimed to replicate our findings (N = 184) in the Alzheimer's Disease Neuroimaging Initiative. Results We observed that high brain atrophy class predicted lower functional performance and steeper decline. This association was moderated by APOE, sex, and high‐risk group. Baseline findings as moderated by APOE and high‐risk group were replicated. Discussion Women APOE ɛ4 carriers may selectively be at a greater risk of functional impairment with higher brain atrophy.