Momentum collapse, huge shock in Korean stocks, quantitative funds face the worst drawdown since August 2025!
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Quantitative funds are experiencing their most intense turbulence so far this year. Amid increasingly abnormal market fluctuations, net asset values of systematic long-short funds have shrunk sharply within just two weeks, triggering industry concerns over potential systemic risks.
According to Goldman Sachs’ latest trading desk memo, as of July 8, quantitative long-short strategy funds have declined a cumulative 3.6% since June 22, marking their biggest drawdown since August 2025.
Quantitative long-short strategy funds have given back about a quarter of their year-to-date gains in two weeks, with returns falling from 14.4% on June 22 to 10.8%. Goldman Sachs trader Mario Laicni attributes this decline to violent internal market rotations and the collapse of momentum trading.
This collective loss among quantitative funds has heightened vigilance among market participants. Some investors still vividly recall the sharp market drawdowns triggered by the quantitative fund crash in August 2007, which is believed to have been linked to the eventual collapse of Lehman Brothers.
The main current question is: With the sell-offs in chip stocks and the Korea Composite Index stabilizing, will the fund community once again increase leverage and chase momentum trades?
Abnormal Market Structure Causes Quant Models to Fail
The root cause of quantitative funds’ current predicament lies in highly abnormal price behavior across multiple global markets, which cannot be predicted by historical patterns.
The Korean market is the most representative example. Goldman Sachs points out that the rapid expansion of single-stock leveraged ETFs for Samsung Electronics and SK Hynix has turned the Korea Composite Index into a "massive self-reinforcing feedback loop."
The Korea Composite Index Volatility Index (equivalent to the VIX for US stocks) recently approached 100 and has triggered six full-market circuit breakers this year. Since the mechanism was established in 2000, there have only been a total of twelve full-market circuit breakers. In other words, half of this century's full-market circuit breakers occurred this year.
Jordi Visser, Head of AI Macro Research at 22V Research, wrote in a research report:
Momentum volatility is currently higher than during the internet bubble, forcing forced closing of positions in hedge funds with Value at Risk (VAR) limits and prompting retail investors to chase breakout trades.
The issue for quantitative funds is that their strategies are, by nature, designed to profit when markets follow established patterns. With multiple markets simultaneously experiencing structural anomalies, systematic long-short funds must continue to endure pressure until risk limits are hit and concentrated position reductions are forced.
Quantitative Short Losses Dominate, Fundamental Funds Cut AI Exposure Proactively
According to Mario Laicini from Goldman Sachs trading desk, the losses from this drawdown are mainly concentrated on the short side of portfolios, led by US stocks, followed by developed markets in Asia and Europe.
From a regional perspective, emerging Asian markets contributed with high volatility but were generally flat. Concentrated unwinding of momentum trades and passive unwinding of crowded Korea-related positions were the main negative factors dragging performance.
Goldman Sachs notes that the core driver of this drawdown is violent internal market rotation and the painful deleveraging process of momentum trades. Such strategies rely on price memory and trend continuation; when the market reverses direction, losses tend to be concentrated and rapid.
Compared to quantitative peers, fundamental long-short funds were relatively less impacted. They dropped 2.2% in the same period, but still maintain a strong year-to-date return of 15.5%. Much of this relative resilience stems from timely and proactive reduction of AI-related positions that drove excess returns earlier in the year.
According to Goldman Sachs data, fundamental funds have recently sold tech stocks on a large scale. Active selling of AI concept stockssignificantly reduced their momentum exposure, bringing their total leverage down to just one tenth of last year's peak. As a result, they avoided most of the losses suffered by their quantitative peers over the past two weeks.
The Information Technology sector and momentum factors remain the main sources of losses for fundamental long-short funds, closely mirroring the situation of quantitative funds.
With signs that the selling pressure in chip stocks and the Korea Composite Index is stabilizing, the current key question for the market is whether the fund community will quickly re-leverage and return to chasing momentum trades.
At present, systematic long-short funds’ positions have essentially returned to starting levels year-to-date, and two weeks’ worth of accumulated profits have shrunk sharply. In a market environment where momentum volatility exceeds that of the internet bubble, the answer to this question will largely determine the direction of market risks in the next stage.
Risk Warning and DisclaimerThe market carries risks, and investments should be made prudently. This article does not constitute personal investment advice, nor does it take into account individual users’ particular investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their specific circumstances. Investing based on this article is at your own risk. ```