Wrong isn't the right word. It's friggin' weird, though. For one, it's utterly unlike, as near as I can tell, literally everything else that's ever been awarded a hugo in that category. It's not really an individual work, it's very nature renders it basically impossible to complete, it's not so much any particular sort of content
itself so much as a container for it... it's like giving a hugo award to book binding or somethin'. So on, so forth.
For two, at least by the wiki page on the category, it wasn't published or translated within the last calendar year (AO3's been around like a decade or so). Individual works within it were, but... still.
For three, it's not really anything specifically to do with sci-fi or fantasy, either. The stuff's heavily involved, sure, but it's not nearly as closely tied as most older/other winners seem to be. It's just a really
odd choice.
It's not a bad thing, exactly (and it's not even remotely like I dislike AO3, even if I probably wouldn't mention it in polite company due to how much smut is on it and how extreme it can get*). Just weird. My reaction's varyingly intense confusion with a side of disappointment I probably won't be able to get the library I work at to mention it much or at all due to all the smut on it.
* I didn't check too hard on the other ones, but this might be the first hugo winner that qualifies as child porn in some countries