According to reports, beneath the calm facade of Wall Street, some heavyweight institutional investors are facing turbulence. This month, a reversal in previously crowded and profitable positions has led quantitative funds into the red. The trading day on Wednesday revealed the risks associated with excessive momentum trading—gold, technology stocks, and cryptocurrencies, which had previously performed well, all plummeted in price simultaneously. A report from Goldman Sachs's institutional brokerage indicated that quantitative long-short funds fell by 1.7% in October, marking their first loss since the significant volatility seen in July, while peer funds utilizing fundamental strategies remained nearly flat. It has been reported that the $20 billion Renaissance Institutional Equities Fund lost approximately 15% as of October 10. Currently, the losses are primarily concentrated among institutional investors employing long-short strategies. Broad stock indices, however, showed significant gains this week, with the S&P 500 up 1.9%, and the Nasdaq 100 up 2.2%. Bitcoin's price lingers around $110,000, significantly below recent peaks; meanwhile, gold saw a slight rebound after plummeting over 5% on Tuesday. In simpler terms, the "decline of momentum trading" essentially refers to the stagnation in asset prices that had previously seen steady increases, such as artificial intelligence and European bank stocks, which has left investors who rode the trend of these profitable assets facing setbacks. A notable example is Morgan Stanley's long-short portfolio tracking momentum stocks, which fell 11.3% over five trading days as of Wednesday, marking its largest decline since March. Concurrently, strategies focusing on the “quality factor” (mainly low-leverage, profitable companies) and the “low volatility factor” also experienced losses, driven by an increase in risk appetite fueled by central bank interest rate cut expectations, which boosted share prices of fundamentally weaker firms. Richard Craib, founder of the $450 million crowdsourced systematic hedge fund Numerai, commented, “The rise of ‘junk stocks’ harms quantitative funds because they typically short low-quality stocks while going long on high-quality ones. If the losses become substantial enough, quantitative funds will begin to deleverage to cover short positions, worsening the situation and triggering a deleveraging chain reaction.” Overall, this downturn bears similarities to the summer of this year when the rise of junk stocks disrupted the previously strong performance of quantitative funds. A notable characteristic of the recent decline is the unusually severe volatility of assets favored by speculators. The "most shorted stock basket" compiled by Goldman Sachs soared 21% since October began (which could potentially hit hedge funds hard), but by Friday, its gains had nearly halved. Beyond Meat Inc. (BYND.US), heavily shorted, saw its stock price surge by 146% on Tuesday due to a flood of retail investor interest, followed by a significant drop; gold recorded its worst single-day performance since 2020 due to profit-taking. Charlie McElligott, Managing Director of Cross-Asset Strategy at Nomura, noted in a report that the "rollercoaster" movements of speculative assets that saw gains at the beginning of October but were recently sold off “exhibit characteristics of another ‘quantitative earthquake’.” Adam Singleton, Chief Investment Officer of External Alpha at Man Group, stated, “The sensitivity of macroeconomic variables and individual stocks to trend reversals seems to be increasing—we have observed this in gold and oil markets.” In the equity market, this sudden rotation is most pronounced within momentum strategies, which buy stocks that have recently risen while shorting those that have recently fallen. Goldman Sachs sales specialist Ioannis Blekos pointed out this week that due to hedge funds continuously reducing their exposure to historical highs of momentum factors, the losses from momentum strategies may persist. Quantitative hedge funds employ a range of trading signals, many of which are proprietary. However, Yin Luo, the quantitative research head at Wolfe Research, stated that overall weakness in quantitative funds in October can be explained by substantial losses occurring across the predominant investment styles shared by most funds. In addition to momentum factors, value factors (favoring undervalued stocks), quality factors (profitable and low-leverage), and low-volatility factors all declined this month. He indicated in an email that these declines imply “institutional investors have had to frequently cut back their risk budgets—this time-lag could trigger a cycle of warming and cooling in risk appetite trading. In short, a self-fulfilling prophecy could exacerbate the situation.” Jupiter Asset Management reported that the $6.3 billion Jupiter Merian Global Equity Absolute Return Fund declined approximately 1.9% this month, on track for its worst performance since 2020, with its gains narrowing to 8.4% this year. Fund manager Amadeo Alentorn attributed the widespread weakness in quantitative funds to the rise of junk stocks and short squeezes in the US market, as well as the decline of momentum factors in the European market. “The drivers are not singular across different regions and industries,” he remarked, “which may explain the notable performance divergence among different fund managers.” Singleton at Man Group noted that while many quantitative funds rely on unique signals that exclude widely known earnings-driven factors, they can still be affected when common factors begin to fall. Nonetheless, similar to July, the reasons for the downturn in quantitative funds this month remain somewhat of a mystery. “Some well-known cases show that fund managers can experience dismal months without apparent reasons for losses, and this has started to become somewhat concerning,” he said.