Aaron Brown, Columnist

Hedge Funds Are Hurting From a Garbage Rally. Who’s to Blame?

Equity quants have been hit with losses on stocks they shorted.

August 4, 2025 at 9:30 AM UTC

Aaron Brown is a former head of financial market research at AQR Capital Management. He is also an active crypto investor, and has venture capital investments and advisory ties with crypto firms. He is the author of the soon-to-be-released "Wrong Number."

Day traders against the machine.
Photographer: Michael Nagle/Bloomberg

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Quant equity hedge funds have enjoyed a strong run for nearly two years, with the first half of 2025 being particularly good. But many of the most prominent funds saw losses in June and especially July, due to what quants are calling a “garbage rally” and blaming on retail day traders.

This appears to be unprecedented in several respects. Previous meme stock rallies were driven by medium-term retail investors, and previous quant hedge fund losses were steeper but lasted only a few days. Now we seem to be seeing meme day traders inflicting many weeks of small losses. Previous quant equity losses hit long and short positions equally, this time it’s only the short positions. Goldman Sachs Group Inc.’s most shorted-stocks basket has surged at a near record pace and its Speculative Trading Indicator is at over three-year highs, according to a Bloomberg News report last Thursday.