JPMorgan: A sharp decline in momentum trading could lead to hedge funds reducing their risk exposure, and the possibility of "cutting positions and reducing leverage" is high.

In the turmoil, momentum trading experienced its worst day in three years. J.P. Morgan's chief broker business said that given the current crowded position, such drastic drops could lead hedge funds to cut their risk exposure. "The performance of long-short and multi-strategy funds has been particularly dependent on the excess returns of technology stocks," wrote the team led by John Schlegel. "The likelihood of increased volatility and the possibility of 'deleveraging and reducing leverage' seem high." The J.P. Morgan team estimated that multi-strategy managers fell 1.9% in February, while long-short funds fell 1%. Quantitative funds were slightly in the red.