Hedge funds forced to liquidate amid global market rout
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Global markets continue to face intense volatility as hedge funds rapidly unwind leveraged positions in response to President Donald Trump's aggressive reciprocal tariffs. This sweeping trade conflict has erased trillions of dollars in market capitalization, sparking fears of widespread margin calls and further selling pressure.
Following Trump's introduction of broad tariffs against almost all global trading partners, equity markets have entered a steep selloff. The benchmark S&P 500 Index recorded a substantial loss of approximately 10.5% over just two sessions, amounting to around $5 trillion in wiped-out market value. Similar downturns were observed across major international indices; China's CSI300 lost more than 5%, while Europe's STOXX 600 slipped nearly 12% since its recent peak, pushing it firmly into correction territory.
Prominent hedge fund managers, notably William Xin of Shanghai-based Spring Mountain Pu Jiang Investment Management, confirmed a complete liquidation of stock holdings, citing growing geopolitical uncertainty and an increasing probability of global recession. Xin divested entirely from equities ahead of market closures due to public holidays, signaling caution over the worsening macroeconomic environment.
Analysts from J.P. Morgan highlight significant reductions in hedge fund leverage, estimating a drop of 5% to 6% last week alone. This deleveraging trend has led net leverage levels among hedge funds to fall close to the lowest points observed since late 2023. Additionally, volatility-targeting portfolios are expected to sell approximately $25-$30 billion in equities, with levered ETFs planning another $23 billion reduction, primarily affecting technology stocks.
Margin calls have become a growing concern as rapid market declines reduce the value of leveraged holdings. In South Korea, margin-driven stock sales reached 28 billion won (approximately $19.15 million) in just three days, surpassing totals from previous months significantly. Although Chinese investors benefited earlier this year from substantial market gains, outstanding margin finance remains elevated at around 1.9 trillion yuan ($260 billion), posing potential risks of intensified forced selling.
Even traditional safe-haven assets like gold faced unexpected pressure due to liquidity-driven selling. Hedge fund managers, such as Bob Zhang from Pine Street Capital in Beijing, have reduced net exposures substantially and implemented additional hedging strategies, anticipating further volatility in the short term.
Moving forward, traders should closely monitor margin call activity, hedge fund leverage ratios, and market volatility indicators like the VIX, which surged significantly in response to recent events. Given these circumstances, prudent risk management and reduced exposure to highly leveraged and speculative positions appear warranted as the market navigates these turbulent conditions.
Prominent hedge fund managers, notably William Xin of Shanghai-based Spring Mountain Pu Jiang Investment Management, confirmed a complete liquidation of stock holdings, citing growing geopolitical uncertainty and an increasing probability of global recession. Xin divested entirely from equities ahead of market closures due to public holidays, signaling caution over the worsening macroeconomic environment.
Analysts from J.P. Morgan highlight significant reductions in hedge fund leverage, estimating a drop of 5% to 6% last week alone. This deleveraging trend has led net leverage levels among hedge funds to fall close to the lowest points observed since late 2023. Additionally, volatility-targeting portfolios are expected to sell approximately $25-$30 billion in equities, with levered ETFs planning another $23 billion reduction, primarily affecting technology stocks.
Margin calls have become a growing concern as rapid market declines reduce the value of leveraged holdings. In South Korea, margin-driven stock sales reached 28 billion won (approximately $19.15 million) in just three days, surpassing totals from previous months significantly. Although Chinese investors benefited earlier this year from substantial market gains, outstanding margin finance remains elevated at around 1.9 trillion yuan ($260 billion), posing potential risks of intensified forced selling.
Even traditional safe-haven assets like gold faced unexpected pressure due to liquidity-driven selling. Hedge fund managers, such as Bob Zhang from Pine Street Capital in Beijing, have reduced net exposures substantially and implemented additional hedging strategies, anticipating further volatility in the short term.
Moving forward, traders should closely monitor margin call activity, hedge fund leverage ratios, and market volatility indicators like the VIX, which surged significantly in response to recent events. Given these circumstances, prudent risk management and reduced exposure to highly leveraged and speculative positions appear warranted as the market navigates these turbulent conditions.