Momentum-driven hedge funds are facing a brutal start to 2025 as shifting economic conditions and geopolitical tensions trigger sharp reversals in previously high-flying trades, according to a report by Bloomberg.
The once-reliable strategy of riding market trends – favouring US tech stocks and betting on US economic outperformance – has been upended, leading to widespread losses across systematic and discretionary hedge funds.
The report cites Societe Generale’s CTA Index as showing that trend-following hedge funds, which typically trade futures based on prevailing price movements, are down 4.3% year-to-date, marking their second-worst start to a year since 2014. Equity-focused momentum strategies have suffered even steeper drawdowns, with one gauge falling 21% in just four weeks up to 10 March, one of the most abrupt declines on record.
The turbulence has also hit exchange-traded funds (ETFs) tracking momentum trades, with BlackRock’s $14bn iShares MSCI USA Momentum Factor ETF seeing $800m in outflows, the largest single liquidation in two years, as investor sentiment toward high-priced US equities soured.
“You’ve got de-risking at the same time as fundamental weakening, at the same time as geopolitical uncertainty,” said Adam Singleton, CIO of external alpha at Man Group, the world’s largest listed hedge fund. “When all of that converges, momentum strategies take a hit.”
Momentum strategies, which profit from extended trends in asset prices, have been caught off guard by sudden reversals across a range of asset classes with once-dominant AI and tech names seeing pullbacks as interest rate concerns and trade risks mount.
The White House’s tariff threats against China, Mexico, and Canada have also led to whipsawing in agricultural markets, erasing early-year gains in corn and soybeans and pressuring commodity-focused hedge funds, while short positions in the Japanese yen – a consensus trade – have been squeezed as renewed concerns over the US economy drove a dollar decline.
The pain has been widespread, affecting both time-series momentum (which follows price trends) and cross-sectional momentum (which bets on relative outperformance within asset classes). According to Hedge Fund Research, 50 of 86 fast-money hedge fund indexes posted losses in February.
Even some of the biggest multi-manager hedge funds, which typically seek uncorrelated returns, struggled as crowded trades unwound. Mulvaney Capital Management, a trend-following fund that surged 83% in 2024, lost 13% in February. Meanwhile, Transtrend’s enhanced risk trend strategy dropped 10% amid commodity market volatility.
