Amid the ongoing bull market, intense sector rotations within equities have triggered the most severe drawdown for quantitative hedge funds since 2023.

An index from S&P Global indicates that a long-short momentum strategy, which involves buying recent outperformers and shorting recent underperformers, has declined over 3% for a second consecutive week. The cumulative two-week loss marks the largest such drop in more than three years.

Data from Goldman Sachs' prime brokerage unit shows that, as of last Thursday, systematic long-short hedge funds fell 2.1% last week, following a 3.1% drop over the prior five trading days. This represents their worst performance since December 2023. Concurrently, performance among fundamentally-driven managers also weakened last week as hedge funds reduced leverage, with technology stocks emerging as one of the most heavily sold sectors.

While the S&P 500 continued its ascent last week, the index's surface-level stability masked a significant internal style shift, presenting greater challenges for active stock pickers. As the frenzy around AI trades cools, popular chip stocks like Micron Technology have weakened, while traditional stocks with lower valuations and slower growth are back in favor.

Jordi Visser, Head of AI Macro Nexus Research at 22V Research, noted in a report, "The volatility in momentum trading now exceeds that of the dot-com bubble era. This is forcing hedge funds constrained by value-at-risk limits to unwind positions and is also trapping retail investors chasing breakout moves."