Hedge-Fund Momentum Bets Crater All at Once in Volatile Markets
(Bloomberg) -- One of the simplest hedge-fund strategies is misfiring this year as once-reliable trends, like betting on Big Tech and the outperformance of the US economy, crater en masse.
Most Read from Bloomberg
Momentum investing, which buys up the market winners and sells the losers, has been swept up in the tariff-fueled volatility assailing global investors in 2025. That’s a blow to trend-chasing quants spreading their bets across a slew of assets — and their hedge-fund peers more broadly, who tend to ramp up exposures to winning trades in the good times, while curtailing risk in the bad times.
As uncertainty has mounted over trade policy and the strength of the US economy, trend-following hedge funds, which typically wager in futures markets, are down 4.3% this year, according to an index compiled by Societe Generale SA. That’s the second-worst start since 2014. Thank sharp reversals in everything from high-flying US tech companies and soybeans to the Japanese yen.
An equities-focused momentum strategy tumbled 21% in the four weeks through March 10, in one of the fastest drawdowns of its kind. As sentiment toward high-priced US equities sours, a $14 billion BlackRock Inc. exchange-traded fund, which chases the biggest stock winners, was hit by a $800 million outflow in the largest liquidation in two years.
“You’ve got de-risking at the same time as fundamental weakening at the same time as geopolitical uncertainty,” said Adam Singleton, chief investment officer of external alpha at Man Group, the world’s largest listed hedge fund. “If you add all that together, then at some point the pressure gets too great and you start to see momentum suffering losses.”
The market unpredictability is spilling into investing styles of all stripes, and about 50 of 86 indexes tracking fast-money strategies posted losses in February, according to one gauge from Hedge Fund Research.
“Triggered by tariff threats, we saw many commodity markets whipsawing in February, triggering losses on both long and short positions,” said Andre Honig, executive director at hedge fund Transtrend, whose so-called enhanced risk trend strategy fell 10% last month. “It showed once more that diversification does not always protect against simultaneous adverse movements in different positions.”
Man’s Singleton says one reason the pain is far-reaching is because two kinds of momentum have been lashed at the same time. So-called time-series momentum, which bets on assets based on their prevailing price moves, is having the second-worst start to a year since 2014. Cross-sectional momentum — industry parlance for wagering on assets based on their performance relative to peers — has registered the third-worst kickoff since 2016, creating challenges for investing styles like statistical arbitrage and long-short stock picking.
So while trend followers have struggled — the likes of Mulvaney Capital Management Ltd. lost 13% in February after soaring 83% last year — even some of the largest multi-manager hedge funds delivered negative returns as the selloff forced them to unwind crowded trades.
The White House’s threatened tariffs on countries including China, Mexico and Canada have rocked agricultural commodities, erasing this year’s gain in the likes of corn and soybeans, while putting pressure on commodity-loving trend followers. Traders shorting the Japanese yen, meanwhile, have suffered amid the slide in the dollar spurred by fears over the trajectory of US economy.
“Some of the themes that worked so well last year, like US exceptionalism and tech and AI — those have been the themes that have reversed the strongest,” said Kevin Cole, CEO & CIO of Campbell & Co. in Baltimore, a quant manager running futures and equity market-neutral strategies. “Investors that were long those positions are feeling that reversal.” Cole’s $1.8 billion systematic macro fund — which incorporates trend following — is up 4.1% this year, profiting from short-term trading signals and currency movements.
The fickle nature of the market is on display again, after stocks staged a back-to-back advance and measures of volatility retreated from recent peaks. While that offers a reprieve for risk takers, it’s a challenge for those quants whose models can be slow to react.
To Mike Chen, the head of alternative alpha research at Robeco, the unraveling of the ‘America First’ narrative creates fresh opportunities for fast-money traders.
“Clearly the system is being shocked,” Chen said at the 2025 Quant Strats conference in New York last week. “It’s opportunity for the right type of investments. I think relative value, macro fundamental focus strategies will benefit from disruption. It just might take a little while for markets reprice what the new reality is.”
--With assistance from Lu Wang.
Most Read from Bloomberg Businessweek
©2025 Bloomberg L.P.
