Quant Funds Suffer Largest Momentum Drawdown Since 2023

Data from S&P Global show a widely tracked long-short momentum strategy fell more than 3% for a second consecutive week, producing a two-week loss that is the strategy’s worst in over three years. Goldman Sachs prime brokerage figures indicate systematic long-short managers declined 2.1% last week through Thursday, after a 3.1% drop in the previous five trading days — the weakest stretch since December 2023. Fundamental hedge funds also posted losses as some managers reduced leverage, with technology positions among the most heavily sold.

The weakness occurred while the broader market advanced. Investors rotated out of high-momentum stocks tied to artificial-intelligence optimism into lower-valued, defensive sectors. Semiconductor names including Micron Technology came under pressure, while value-oriented and low-volatility shares rebounded. Momentum-focused strategies were hurt because positions had become more concentrated after a multi-year rally.

Long-short momentum strategies take long positions in recent winners and short positions in laggards, so sudden reversals in a narrow group of winners can force rapid portfolio adjustments. Elevated volatility in momentum factors and concentrated holdings prompted some funds that operate under value-at-risk constraints to pare exposures, which added to selling pressure. Increased retail trading in breakout names widened factor dispersion and amplified swings in momentum-sensitive stocks.

The S&P momentum index had climbed for nearly three years and reached its highest level since the series began in 2002. Gross leverage tied to high-momentum positions has declined during the selloff, but UBS Systematic Advisory said positioning remains elevated compared with the past two years, leaving scope for further unwinding.

The reversal eased briefly when technology and semiconductor shares rebounded, lifting the momentum factor by about 2% on Monday. Despite the recent drawdown, Goldman Sachs estimates systematic hedge funds remain up roughly 11.1% year-to-date, while fundamental hedge funds have gained about 16%.