"After a magnitude 7 earthquake, there will certainly be aftershocks"? After major AI losses in July, hedge funds suffered another heavy blow on Wednesday.

Following the AI-related stock sell-off in July that hit Wall Street hard, quantitative hedge funds suffered another heavy blow on Wednesday, recording their worst single-day performance in over two years.

On August 20, according to the Financial Times, an internal Goldman Sachs memo indicated that as of 1 p.m. EDT Wednesday, systematic long-short hedge funds fell by 1.4% on the day, marking their worst single-day performance in more than two years. The deviation of Goldman Sachs' "Global Momentum" index had far exceeded the normal historical range. The main sparks for the market volatility included: the US Treasury announcing it would at least double the purchase of long-term Treasury bonds to stabilize the bond market, and vaccine manufacturer Moderna's stock nearly tripling in a single day after announcing positive trial results for its experimental skin cancer therapy.

Reports noted the impact further exacerbated the difficulties faced by "momentum trading" strategies that have been under pressure since the AI stock sell-off weeks ago, raising fresh questions within the market about whether quantitative funds can operate stably in a high-volatility environment.

Momentum strategies face abnormal shocks

The losses this time were concentrated in funds with significant "momentum factor" exposure—that is, strategies that systematically buy rising stocks and sell declining ones.

According to a Morgan Stanley client memo seen by the Financial Times, this was the first time in at least five years that the bank had observed its "pure momentum" index drop by more than 4% in a single day, while the S&P 500 index actually closed up on the same day.

A portfolio manager at a major asset management company said, "It doesn't take many names like Moderna" to make risk managers "a little nervous," implying that sharp volatility in just a single stock can trigger chain shocks across the entire quantitative strategy system.

A hedge fund manager put it bluntly:

"Volatility is extremely abnormal, and options market makers are taking hits on all sides. The market rotates daily; what makes money today will almost certainly fall tomorrow."

A top executive at a leading quantitative hedge fund used an earthquake analogy to explain the market’s inner logic:

"If there's a magnitude 7 earthquake, there are bound to be aftershocks in the following days. It won't go straight to zero, but market participants are reducing their risk exposures."

This statement reveals the core dilemma currently facing quantitative funds: in extreme volatility, as all parties simultaneously deleverage and compress risk, they instead intensify the market's nonlinear swings, creating a self-reinforcing negative feedback loop.

Quantitative funds have faced similar difficult periods in the past. In 2018, the industry experienced a prolonged "quant winter," as automated investment strategies broadly failed and profitability suffered significant losses.

However, despite the recent sharp market swings, the Goldman Sachs memo showed that systematic long-short funds have still posted a cumulative gain of about 1.7% so far this month, indicating that an overall meltdown has not occurred.

It is also noteworthy that in July, an AI-stock sell-off lasting several weeks caught Wall Street off guard, with many hedge funds posting monthly losses.

The most high-profile case was the highly leveraged AI-themed fund Situational Awareness—which was ultimately forced to sell the bulk of its public market equity positions to Citadel at a steep discount.

Even institutions renowned for their stable profitability were not spared. Reports indicate the mysterious trading giant Jane Street, which dominates the global market, suffered a loss of about $15 billion last month due to bets on Situational Awareness and related AI stocks.