Hedge funds had their worst day in months this week. Is more turbulence on the way?

This week, concerns over the impact of artificial intelligence triggered volatility in the U.S. stock market, affecting a range of hedge funds that had previously shown strong performance at the start of 2026.

According to a report from Goldman Sachs’ prime brokerage, one of the most dramatic market rotations in recent years has completely disrupted stock performance rankings, with both fundamental and systematic long-short hedge funds recording their worst single-day performance since at least November last year. Goldman Sachs estimates that multi-strategy equity portfolios also experienced their worst day since April last year.

The Goldman Sachs team led by Vincent Lin wrote: “Wednesday’s market swings almost simultaneously hit all stock strategies hard, 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 selloff triggered by the COVID-19 pandemic.”

In this turmoil, momentum trading—a popular quantitative strategy that buys recent winners and sells losers—suffered its worst day in three years. JP Morgan’s prime brokerage noted that such a steep decline, combined with currently elevated positions, may prompt hedge funds to reduce their risk exposure.

The team led by John Schlegel wrote: “The performance of equity long-short and multi-strategy funds previously benefited especially from tech-driven alpha. The likelihood of further volatility and deleveraging going forward appears quite high.”

This intense market rotation stemmed mainly from multiple concerns about AI: whether the massive investments driving AI development will ultimately pay off, and how this technology will affect the business models of existing software giants. For hedge funds, this shock comes after a strong start to the year, with the largest multi-strategy managers returning around 1% to 2% in January.

On Thursday, JP Morgan’s team estimated that multi-strategy funds have declined 1.9% this month, equity long-short funds dropped 1%, and quantitative funds were only slightly negative.

Despite previous profitable trades being hit by sharp volatility, there were also winners in the market. According to the S&P Global Index, value strategies—those investing in undervalued stocks—are set for their best weekly performance since 2022. Small-cap stocks outperformed large caps, and defensive stocks performed better than high-volatility stocks.

Additionally, though Wednesday saw the largest deleveraging by hedge funds in the U.S. single-stock market since October last year, Goldman Sachs analysts said this degree of deleveraging is still “relatively moderate.” The data shows that over the past year, hedge funds’ total and net exposures have steadily increased and currently remain at elevated levels.

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