JPMorgan: Sharp declines in momentum trading may prompt hedge funds to reduce risk exposure, with a high likelihood of "position reduction and deleveraging"

Glonghui, February 7th｜Amid turbulence, momentum trading (Momentum Trade, a popular quantitative method that buys recent winners and sells losers) experienced its worst day in three years. JPMorgan's prime brokerage business stated that, given the current overcrowded positions, such a sharp decline could lead hedge funds to reduce their risk exposure. "The performance of equity long-short strategies and multi-strategy funds has previously relied particularly on the excess returns (alpha) of technology stocks," wrote the team led by John Schlegel. "The likelihood of further volatility and 'de-grossing' appears to be very high." The JPMorgan team estimates that multi-strategy managers will decline by 1.9% in February, while equity long-short funds may fall by 1%. Quantitative funds are in a slight loss position.