JPMorgan Chase: A sharp decline in momentum trading may lead hedge funds to reduce risk exposure, with a high possibility of "reducing positions and lowering leverage."

In the midst of turmoil, momentum trading (a popular quantitative method of buying recent winners and selling losers) faced its worst day in three years. JPMorgan's prime brokerage business stated that given the current crowded positions, such a sharp decline could lead hedge funds to reduce their risk exposure. "The performance of long-short equity strategies and multi-strategy funds has previously relied heavily on the excess returns (alpha) of technology stocks," wrote the team led by John Schlegel. "The volatility is further exacerbated, and the likelihood of 'de-grossing' seems high." The JPMorgan team estimated that multi-strategy management firms would decline by 1.9% in February, while long-short equity funds might drop by 1%. Quantitative funds are in a slight loss position