Quantitative traders are suffering heavy losses. Some executives say they know the reasons. A contemplative and sad man sits in front of his laptop, bathed in red light. Crystal Cox/Insider * Since early June, quantitative hedge funds have been in the red. • The reasons remain unclear, although executives, traders, and banks have pointed to several factors. • Wednesday was another tough day, with average quantitative funds losing 0.8%, according to Goldman Sachs. While the fundamental investment community marvels at another potential bubble composed of hot stocks and retail investors, quantitative hedge funds are trying to solve a more complex problem. Since early June, the smart money firms have endured more than a week of consecutive losses, with multiple companies, including Qube, Two Sigma, and Point72's Cubist, suffering during this period. According to Goldman Sachs, Wednesday was another difficult trading day for many funds, with average quantitative funds losing 0.8%. The bank's top brokerage division indicates that July is expected to be the worst month in five years, pointing to similar factors as earlier this week: momentum selling, crowded trades, and high volatility in certain stocks. Business Insider previously reported that quantitative firms have been trying to figure out why systematic trading has gradually lost ground after a hot start to the year. Goldman Sachs is not the only firm starting to understand what is happening. Computer managers have proposed theories, found similarities with past markets, and are even planning for a quick rebound. A belief that is forming is that a widespread market disaster is unlikely to spread because the source of the pain is not fundamental market weakness or a potential economic storm, but rather the opposite: an unexpectedly strong economy injecting liquidity into the market—and some dubious stocks—caught quantitative investors off guard. Jacob Klein, founder of Black Forest Technology, wrote in a notice to investors on Friday that the current situation "is completely different from 2007," when forced deleveraging caused rapid losses across the system. Klein, who served on Bridgewater's investment committee, stated that this summer's big dump is "a byproduct of what we politely call a 'junk rebound.'" He speculated that the recent recovery of heavily shorted junk stocks forced some smaller quantitative firms to sell their positions, increasing the pain for everyone still holding. "It's a bad month, but not a crisis; the drivers are unusual but not surprising," the note said. This is not to say that Sydney Sweeney and that trading group should give too much trust to Sydney Sweeney and those "meme stock" crowds. They arrived too late. The story continues: an executive from a multi-manager fund involved in quantitative strategies noted that some large funds had already begun to notice losses before June. In the weeks before Kohl's and American Eagle became retail darlings, some micro caps and thinly traded Chinese stocks "had been running for three weeks, doing silly things." "No underlying disease. No COVID. No major financial crisis," said the diversified management executive. He primarily attributed the responsibility to the general rise in market liquidity and risk appetite stemming from positive macroeconomic developments that began a few months ago. According to Klein, a "special situation" arose before the quantitative funds began to sell off. As June approached, the overall market's rebound was primarily driven by retail and systematic trend followers. Hedge funds had relatively low net exposure—but they hedged their quality stocks by shorting weak stocks, which proved profitable. The market reached its ATH in June, prices soared so high that hedge funds stopped increasing their holdings in these high-quality stocks while also halting shorting weak stocks. Closing their short positions boosted the "junk" stocks, attracting retail traders and meme stock enthusiasts, further driving these positions up. Because quantitative traders use their mathematical abilities.