"2007 Quantitative Earthquake" Replayed? Retail Investors Force Short Squeeze, U.S. Quant Funds Face Largest Drawdown in 5 Years!

Quantitative funds are facing their worst monthly losses in nearly five years.

Goldman Sachs trader data shows that quantitative funds have accumulated a loss of 3.6% in July, down 5% since early June, marking the worst monthly performance in nearly five years.

Rich Privorotsky, head of Goldman Sachs' Delta-One business, warned that the current market conditions remind him of the quantitative crisis in August 2007 and expressed concerns about the rapid liquidation risks of quantitative strategies. He noted that quantitative funds have faced issues in performance over the past six weeks, with quantitative strategies underperforming fundamental long-short strategies.

Market data indicates that momentum trading, crowded long positions, and high-volatility stocks have become the main factors dragging down the performance of quantitative funds. Meanwhile, retail investors have re-entered stocks with high short interest, driving a new round of short squeeze, further exacerbating the drawdown of quantitative strategies.

Short Squeeze Market Ferments, "Meme Stocks" Trend Reemerges

A large-scale short squeeze market continues to ferment.

Market data shows that Goldman Sachs' "Most Shorted vs. Least Shorted" portfolio rose 2% yesterday, achieving the best monthly return since January 2021.

Retail participation in stocks with high short interest has significantly increased. Individual stocks like Kohl's surged over 100%, reflecting market characteristics reminiscent of the meme stock era. The volatility ratio of U.S. momentum strategies relative to the S&P 500 index has reached the upper end of the range over the past month.

Goldman Sachs' Robert Quinn pointed out that during the meme stock craze in 2021, the Russell 2000 index significantly outperformed its peers. From December 29, 2020, to March 16, 2021, Goldman Sachs' meme stock basket and the Russell 2000/S&P 500 price ratio surged by 17% and 11%, respectively.

Quantitative Strategies Face Systemic Risks

Rich Privorotsky stated that he vividly remembers the rapid liquidation process during the quantitative crisis in August 2007.

Currently, the total exposure of quantitative funds remains at historical highs, largely due to the emergence of numerous quantitatively driven strategies. The volatility in the Japanese market undoubtedly exacerbates the situation, with the drawdown of momentum strategies further worsening due to the short squeeze.

Historical data shows that when the volatility of momentum strategies reaches high levels, it typically signals a period of consolidation until volatility recedes.

Goldman Sachs' trading team has observed that as meme stocks regain market focus, a shift in capital flows similar to that of 2021 is re-emerging.

Goldman Sachs also added that despite the severe drawdown, quantitative funds have still recorded positive returns this year, indicating potential for recovery in the medium to long term, but in the short term, the rebound of high-volatility stocks may continue to squeeze momentum trading, forcing fund managers to reduce leverage or reallocate.

Risk Warning and Disclaimer

The market carries risks, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk