Quantitative funds are navigating their most severe turbulence of the year. Against a backdrop of persistently heightened market volatility, systematic long-short funds have seen their net asset values plummet within a mere two weeks, raising industry alarm over potential systemic risks.

According to the latest internal memo from Goldman Sachs' trading desk, as of July 8th, quantitative long-short strategy funds have declined by 3.6% cumulatively since June 22nd, marking their most significant drawdown since August 2025.

These quantitative long-short strategy funds have surrendered roughly one-quarter of their year-to-date gains in two weeks, with their YTD return dropping from 14.4% on June 22nd to 10.8%. Goldman Sachs trader Mario Laicni attributes this decline to intense internal market rotations and the collapse of momentum trading.

The collective losses incurred by quantitative funds have put market participants on high alert. Some investors vividly recall the market-wide drawdown triggered by the quant fund crash of August 2007, an event later linked to the ultimate collapse of Lehman Brothers.

The central question now is: as selling pressure on chip stocks and the Korean Composite Index shows signs of stabilization, will the fund community re-leverage and chase momentum plays once more?

Unusual Market Structures Render Quantitative Models Ineffective

The root cause of the current predicament for quantitative funds lies in the highly anomalous and historically unpredictable price action occurring across multiple global markets.

The Korean market serves as a prime example. Goldman Sachs notes that the rapid expansion of single-stock leveraged ETFs for Samsung Electronics and SK Hynix has transformed the KOSPI into a "giant self-reinforcing feedback loop."

The Korea Composite Index Volatility Index (akin to the VIX) recently approached 100, and the market has triggered six market-wide circuit breakers this year alone. Since the mechanism's establishment in 2000, there have been only twelve such events in total. This means half of all market-wide halts this century have occurred in the current year.

Jordi Visser, Head of AI Macro Research at 22V Research, wrote in a report:

Momentum volatility is now higher than during the dot-com bubble, forcing the liquidation of hedge funds with Value-at-Risk (VaR) limits and retail investors chasing breakouts.

The issue for quant funds is that their strategies are inherently designed to profit when markets follow established patterns. With multiple markets experiencing structural anomalies simultaneously, systematic long-short funds are under sustained pressure, forced into concentrated deleveraging once they hit their risk limits.

Quant Shorts Bear the Brunt; Fundamental Funds Proactively Cut AI Exposure

According to Goldman Sachs trading desk analyst Mario Laicini, the losses from this drawdown are primarily concentrated on the short side of portfolios, led by US equities, followed by Developed Asia and Europe.

Regionally, contributions from Emerging Asia, while volatile, have been roughly flat overall. The concentrated unwinding of momentum trades and the forced closure of crowded Korea-related positions were the main negative factors dragging performance.

Goldman Sachs identifies the core drivers of this drawdown as severe internal market rotations and the painful deleveraging of momentum trades. Such strategies rely on price memory and trend continuation, often leading to concentrated and rapid losses when market direction reverses.

Compared to their quantitative peers, fundamental long-short funds have been relatively less impacted, declining 2.2% over the same period while maintaining a robust 15.5% YTD return. This relative resilience stems largely from their timely and proactive reduction of AI-related positions, which had driven outperformance for much of the year.

Goldman Sachs data indicates that fundamental funds have been large-scale sellers of tech stocks recently. Their aggressive selling of AI-concept stocks significantly reduced their momentum exposure and brought their total leverage down to its lowest decile over the past year. Consequently, they have avoided much of the losses suffered by quant peers over the past two weeks.

The Information Technology sector and the momentum factor remain the primary sources of losses for fundamental long-short funds, a situation highly consistent with that of quantitative funds.

As selling pressure on chip stocks and the KOSPI shows tentative signs of easing, the market's central focus is whether the fund community will swiftly re-leverage and re-enter the market to chase momentum.

Currently, the year-to-date positioning of systematic long-short funds has largely returned to its starting point, with two weeks of accumulated profits significantly eroded. In a market environment where momentum volatility exceeds dot-com bubble levels, the answer to this question will largely dictate the risk direction for the market in the next phase.