Wall Street quant funds encountered an "October cold front," with the momentum strategy ebbing away, causing losses for several giants.

Behind the calm facade of Wall Street, some heavyweight professional investors are experiencing turmoil. This month, as crowded and profitable positions have reversed, quant funds have suffered losses. Wednesday's trading day exposed the risk of excessive momentum trading previously strong-performing assets such as gold, tech stocks, and cryptocurrencies all plummeted simultaneously. A report released by Goldman Sachs Group, Inc.'s institutional brokerage business on Thursday showed that quant long-short funds fell 1.7% in October, marking their first loss since a significant volatility in July; meanwhile, funds using fundamental strategies saw flat returns. The Renaissance Institutional Equities Fund, with a size of $20 billion, reported a loss of approximately 15% as of October 10. Currently, the losses are primarily concentrated among institutional investors using long-short strategies. The broad stock indices closed the week with significant gains, with the S&P 500 rising 1.9% and the Nasdaq 100 rising 2.2%. The price of Bitcoin hovered around $110,000, well below its recent peak, while gold rebounded slightly after a more than 5% drop on Tuesday. In simple terms, the essence of the "momentum reversal" is that assets that were steadily rising, such as artificial intelligence, European bank stocks, and gold, have stalled in their performance, causing setbacks for all investors who followed suit. For example, Morgan Stanley's long-short portfolio tracking momentum stocks dropped 11.3% in the five trading days leading to Wednesday, marking the largest decline since March. At the same time, strategies focusing on the "quality factor" (primarily low-leverage profitable companies) and the "low volatility factor" also saw losses due to increased risk appetite from central bank rate cut expectations, which elevated the stock prices of weaker companies. The sudden rotation in the market, where speculative assets that were rising earlier have now been sold off, has caused a turbulence resembling a "quantitative earthquake." The volatility in favored assets is unusually high, leading to significant fluctuations. In equity markets, this sudden rotation is most evident in momentum strategies, which involve buying stocks that have recently risen and selling those that have recently fallen. Ioannis Blekos, a stock sales specialist at Goldman Sachs Group, Inc., pointed out this week that the continued reduction in exposure to historical high levels of the momentum factor by hedge funds could prolong losses in momentum strategies. Quant hedge funds use various trading signals, many of which are proprietary. However, Yin Luo, Quantitative Research Director at Wolfe Research, explained that the weak performance of quant funds in October can be attributed to substantial losses across multiple funds sharing common investment styles. In addition to the momentum factor, the value factor (preferring low-priced stocks), the quality factor (profitable and low leverage), and the low volatility factor all experienced declines this month. Luo wrote in an email that the decline in these factors means "institutional investors have had to frequently reduce risk budgets this time lag could likely trigger rounds of risk appetite heating up and cooling down trades. In short, self-fulfilling prophecies are making the situation worse." The Jupiter Merian Global Equity Absolute Return Fund, with assets of $6.3 billion at Jupiter Asset Management, fell approximately 1.9% this month and is expected to mark its worst performance since 2020, with its gains since 2025 narrowing to 8.4%. Fund manager Amadeo Alentorn attributed the general weakness in quant funds to the surge in junk stocks and short squeezes in the US market, as well as the decline in momentum factors in the European market. Adam Singleton from Man Group pointed out that while many quant funds rely on unique signals (excluding well-known profitability drivers), they could still be affected when common factors decline. However, like in July, the reasons for the decline in quant funds this month still remain somewhat mysterious. "Some high-profile cases show that fund managers may experience bad months without obvious reasons, which is starting to become somewhat concerning," he said.