Wall Street Momentum Trade Unravels Sharply, Posting Worst Quarterly Underperformance in 25 Years
nashnova research
The S&P 500 Momentum Index has fallen more than 9% since July 1 while the broader S&P 500 gained 2.8%, putting it on track for its worst quarterly underperformance in 25 years. This means → Wall Street's most crowded trade of the first half is violently unwinding, hitting quant funds and retail investors alike.
How bad are the numbers?
The S&P 500 Momentum Index surged 44% in Q2 and gained 133% over five years — nearly double the broad market.
Since July 1 it has dropped more than 9%, while the S&P 500 rose 2.8%. This means → two months erased a large chunk of the strategy's excess returns.
Bank of America data show July was the second-worst month for momentum trading in nearly 40 years, behind only April 2009 at the depths of the global financial crisis.
How badly are hedge funds hurt?
Goldman Sachs data: the single-month underperformance of hedge-fund crowded-stock baskets versus the S&P 500 in July was the worst in over 20 years.
Goldman also flagged August 19 as the worst single day in over two years for "systematic long-short managers" — quant funds that go long and short simultaneously — with roughly half the losses tied to momentum trades.
Situational Awareness, a hedge fund heavily positioned in chip stocks, ran into trouble after the sharp swings, and its blowup further amplified market turbulence.
What lit the fuse — and why biotech?
A key trigger: positive data from a cancer vaccine developed jointly by Moderna and Merck sent Moderna's stock up roughly 150% this month.
In plain terms = biotech had been one of the most heavily shorted sectors in recent years. When good news hit, short sellers were forced to buy back shares to close positions, and losses snowballed.
The forced short-covering crushed quant and hedge funds on two fronts — the short side (biotech) got squeezed while the long side (AI chip stocks) pulled back at the same time.
What is the smart money doing now?
CFTC data show speculative net short positions in Nasdaq 100 futures have climbed to among the highest levels in nearly 20 years. This reflects a sharp sentiment shift from euphoria to defense.
Mike Ogborne, founder of Ogborne Capital Management, says he has grown more cautious on tech and holds more cash than usual. He compared Big Tech's ever-rising capital expenditure to "Cinderella and the stroke of midnight" — "nobody sends you a memo telling you the capex cycle is over."
Put simply = when everyone is running in the same direction, the biggest risk is not being wrong — it is not knowing when the music stops.
Why does momentum work long-term — and why does it suddenly break?
The core logic: assets with strong gains tend to keep outperforming; weak performers tend to keep lagging. Information takes time to spread, large pension funds cannot reposition in a day, and investors tend to sell winners too early while holding losers too long — these behavioral biases underpin momentum's long-run effectiveness.
Matthew Tym, managing director at Cantor Fitzgerald, calls it a "self-fulfilling prophecy" — the more people chase gains, the stronger the rally, which in turn draws even more buyers.
But Antti Ilmanen of AQR Capital Management notes: "Every strategy has its disappointing periods." Historically, momentum's worst months have tended to occur within longer stretches of outperformance.
What is the real unresolved question?
Is this reversal a brief mean-reversion — a normal pullback after an outsized run — or a deeper structural unwind as crowding in the AI trade peaks?
If the former, momentum will regain its edge once volatility is digested. If the latter, the trading logic built around AI over the past five years may need a fundamental reassessment.
This reflects a larger issue: when a strategy's crowdedness itself becomes the primary risk, "effectiveness" and "danger" may be two sides of the same coin.
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