The value strategy is set for its best week since 2022, while the momentum trade had the worst day in three years amid the rotation to value.
The turmoil unleashed in stocks this week by worries about the impact of artificial intelligence has rattled a slew of hedge fund strategies that had been enjoying a strong start to 2026.
As one of the wildest rotations in years scrambled the equity leaderboard, both fundamental and systematic long-short hedge funds posted the worst day since at least November on Wednesday, according to a note from Goldman Sachs Group Inc.'s prime brokerage. Multi-strategy equity portfolios suffered the worst session since April, the bank estimated.
"Wednesday's moves severely impacted all equity strategies simultaneously with more than two thirds of funds in each index down," wrote a Goldman team led by Vincent Lin. "Last time all three strategies were down more than 75 basis points in a single day happened during Covid sell-off."
Amid the turbulence, the momentum trade -- a popular quant approach that buys recent winners and sells losers -- had the worst day in three years. Such a sharp drop could lead to hedge funds reducing their exposure given current stretched positioning, according to JPMorgan Chase & Co.'s prime brokerage.
"Performance for equity long-short and multi-strats had been supported by tech alpha in particular," wrote the team led by John Schlegel. "The potential for there to be further volatility and de-grossing seems high."
Momentum Trade Suffers Historic Drawdown Amid Rotation to Value
The powerful rotation largely centered on a combination of AI worries: whether the huge investments required to drive its development can ever pay off, and how the technology will impact the business models of established software giants. For hedge funds, it comes after a positive start to the year, with the largest multi-managers having delivered a January return of roughly 1% to 2%.
The JPMorgan team estimated on Thursday that multi-strategy managers had dropped 1.9% this month, while equity long-short funds were down 1%. Quants were just slightly in the red.
While previously money-making trades suffer in the swings, there are winners. The value strategy — which targets under-priced shares — is set for its best week since 2022, an S&P Global index shows. Small-caps have also outperformed large, while safer shares are beating volatile ones.
And although Wednesday marked the largest hedge fund deleveraging in US single stocks since October, the reduction was still "relatively modest," the Goldman analysts said. Gross and net exposures across hedge funds have climbed over the past year and remain elevated, their data show.