Beneath the surface of apparent prosperity in the U.S. stock market, a severe internal rotation is pushing quantitative hedge funds toward their worst performance trough since 2023. According to S&P Global indices, the long-short momentum strategy that tracks "buying recent winners and selling losers" has declined by over 3% for the second consecutive week, with the cumulative drawdown over the past two weeks reaching a more than three-year high. Data from Goldman Sachs' prime brokerage business shows that as of last Thursday, July 2, systematic long-short strategy funds fell by 2.1% for the week, following a sharp 3.1% drop the previous week, marking the largest five-day decline since December 2023. Fundamentally-driven funds also recorded losses last week, with hedge funds overall reducing their leverage exposure. Technology stocks were among the most heavily sold sectors. Although the S&P 500 index steadily advanced overall last week, intense underlying divergence is profoundly disrupting stock pickers' positioning. As the fervor for AI trades subsides, high-flying chip stocks, represented by Micron Technology, have continued to decline, while previously lagging traditional sectors with low valuations have rebounded once more. Jordi Visser, Head of AI Macro Correlation Research at 22V Research, noted in a report: "The volatility of momentum strategies has now surpassed that of the internet bubble era and is forcing hedge funds constrained by Value at Risk (VaR) limits and retail traders chasing breakout trends to liquidate positions passively." Momentum strategies have historically been notorious for "epic crashes," with their holdings often overlapping significantly with crowded winning trades—in this cycle, core AI beneficiaries were precisely their major holdings. Prior to this sell-off, the S&P Momentum Index had risen for nearly three consecutive years, reaching its highest historical level since data began in 2002. A report from UBS's systematic advisory team released last Thursday pointed out that although the overall leverage for high-momentum stocks has decreased somewhat, it remains elevated on a two-year horizon, stating that "the positioning structure remains vulnerable to further unwinding pressure." The backdrop for this quantitative deleveraging is that, while computer-driven funds performed well overall over the past year, they have repeatedly experienced significant and sometimes inexplicable drawdowns, including last summer and early this January. Unlike previous pullbacks partly triggered by rebounds in low-quality stocks, the context has changed notably this time—low-volatility sectors are regaining strength. Goldman Sachs data indicates that, even after recent pain, systematic strategy funds are still up approximately 11.1% year-to-date, while fundamentally-driven strategy funds have gained nearly 16%.