Quantitative hedge funds are experiencing their most challenging period since late 2023 as a sharp reversal in momentum trades disrupts systematic strategies and prompts deleveraging across the industry, cited a Bloomberg report.
A widely tracked long-short momentum strategy, which takes long positions in recent outperformers while shorting laggards, declined by more than 3% for a second consecutive week, according to S&P Global data. The two-week drawdown marks the strategy’s worst performance in more than three years.
Goldman Sachs’ prime brokerage data showed systematic long-short managers fell 2.1% last week through Thursday, following a 3.1% decline over the previous five trading days—the weakest stretch since December 2023. Fundamental hedge funds also posted losses as managers reduced leverage, with technology stocks among the most heavily sold positions.
The weakness comes despite continued strength in the broader market. While the S&P 500 advanced over the week, leadership beneath the surface shifted sharply as investors rotated out of high-momentum AI beneficiaries and into lower-valued, defensive sectors.
Recent market leaders, including semiconductor stocks such as Micron Technology, came under pressure, while value-oriented and lower-volatility shares staged a rebound. The abrupt rotation has been particularly disruptive for momentum-focused strategies, where positioning had become increasingly concentrated following a multi-year rally.
According to market participants, elevated momentum volatility has forced some hedge funds operating under value-at-risk (VaR) constraints to reduce exposures, adding to selling pressure. At the same time, retail participation in breakout trades has contributed to heightened factor dispersion.
Momentum had been one of the market’s strongest-performing factors, with the S&P momentum index climbing for nearly three years to its highest level since the data series began in 2002. Although gross leverage tied to high-momentum positions has declined during the recent selloff, UBS Systematic Advisory noted that positioning remains elevated relative to the past two years, leaving the factor vulnerable to further unwinding.
The reversal briefly eased at the start of the week as technology shares, particularly semiconductors, rebounded, lifting the momentum factor by roughly 2% on Monday.
Despite the recent setback, systematic hedge funds remain ahead for the year, with Goldman Sachs estimating returns of approximately 11.1%, while fundamental hedge funds have gained close to 16%, underscoring that the latest drawdown represents a significant but, so far, contained setback within an otherwise strong year for hedge fund strategies.
