Concerns surrounding the impact of artificial intelligence triggered turbulence in U.S. stock markets this week, impacting a range of hedge funds that had started 2026 on a strong note. A report from Goldman Sachs Group's prime brokerage unit indicated that one of the most significant market rotations in recent years completely reshuffled stock performance rankings. Both fundamental and systematic long-short hedge funds recorded their worst single-day performance since at least last November on Wednesday. Goldman Sachs estimated that multi-strategy equity portfolios also experienced their most challenging day since April of last year.

The team led by Vincent Lin at Goldman Sachs wrote, "Wednesday's market volatility hit nearly all equity strategies simultaneously, with more than two-thirds of funds in each index declining. The last time all three strategies fell by more than 75 basis points in a single day was during the pandemic-induced sell-off."

Amid the turmoil, momentum trading—a popular quantitative strategy that involves buying recent winners and selling losers—suffered its worst day in three years. JPMorgan's prime brokerage unit suggested that such a sharp decline, combined with currently elevated positioning, could prompt hedge funds to reduce their risk exposure.

A team led by John Schlegel wrote, "Long-short equity and multi-strategy funds had previously benefited significantly from alpha generated by technology stocks. The likelihood of further volatility and deleveraging appears quite high going forward."

This intense market rotation stemmed primarily from multiple concerns regarding artificial intelligence: whether the massive investments driving AI development will ultimately yield returns and how the technology will impact the business models of established software giants. For hedge funds, this shock occurred after a strong start to the year, with some of the largest multi-strategy managers posting returns of approximately 1% to 2% in January.

The JPMorgan team estimated on Thursday that multi-strategy funds had declined 1.9% for the month, long-short equity funds were down 1%, and quantitative funds were only slightly negative.

Although previously profitable trades faltered amid the sharp volatility, some winners emerged in the market. According to S&P Global indexes, value strategies—which involve investing in undervalued stocks—were on track for their best weekly performance since 2022. Small-cap stocks also outperformed large-caps, while defensive stocks fared better than high-volatility equities.

Additionally, despite Wednesday witnessing the largest single-day hedge fund deleveraging in the U.S. single-stock market since last October, Goldman Sachs analysts noted that the scale of deleveraging remained "relatively moderate." Data showed that both gross and net exposures of hedge funds had continued to rise over the past year and remained at elevated levels.