Global hedge funds cut risk as tariff shock drives net leverage
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Global hedge funds are increasingly on the defensive as sharp market declines triggered by escalating trade tensions continue to reshape portfolio strategies. According to data compiled by Morgan Stanley, hedge funds posted widespread losses last week, reversing year-to-date gains and pulling average performance down by 3%. The move coincided with a steep decline in net leverage, which fell to 37%—just shy of historical lows—highlighting the scale of de-risking underway across
the industry.
The rout was catalyzed by U.S. President Donald Trump’s announcement of sweeping new tariffs, effectively igniting a global trade war. China swiftly responded with 34% reciprocal duties on U.S. imports, intensifying fears of a global recession. In the immediate aftermath, the S&P 500 shed over 10%, while the FTSE 100 fell more than 6%, marking the worst two-day period for global equities since the onset of the COVID-19 pandemic in 2020.
Morgan Stanley noted that U.S. long-short equity hedge funds began unwinding positions even before the official tariff announcement, suggesting that institutional players were bracing for heightened volatility. Export-driven Asian markets bore the brunt of the initial selloff, exacerbating pressure on hedge funds heavily exposed to cyclical and international equities.
Leverage metrics reflect this pivot. Morgan Stanley’s estimate of 37% net leverage, down from over 50% at the start of the year, indicates a significant retreat from risk. A similar note from JPMorgan confirms the trend, stating that hedge fund net leverage is now hovering near its lowest levels since late 2023. Net leverage, defined as the ratio of a fund’s net long exposure relative to total assets including borrowed capital, is a key gauge of a fund’s risk posture. A drop to these levels suggests an environment dominated by risk aversion and liquidity management.
Notably, Hong Kong’s Hang Seng Index recorded its steepest one-day drop since 1997, underscoring the systemic nature of the current market stress. Broad commodity weakness has further fueled the bearish sentiment, with oil prices tumbling to a four-year low on Monday. The combination of geopolitical uncertainty, slowing global trade, and fears of inflationary spillover is complicating the macro outlook for hedge funds and asset managers alike.
Eddie Tam, CIO of Central Asset Investments in Hong Kong, noted that the global equity selloff has thus far unfolded in a relatively orderly fashion—a detail that may point to more turbulence ahead. With volatility still rising and margin calls accelerating in several jurisdictions, many funds appear to be adopting a “risk-off” strategy until visibility improves.
For investors and traders, the key takeaway is clear: the sharp drop in hedge fund leverage signals reduced market liquidity and growing fragility in asset pricing. As tariff headlines continue to dominate the macro narrative, caution remains warranted, particularly in sectors sensitive to global trade dynamics and interest rate expectations.
The rout was catalyzed by U.S. President Donald Trump’s announcement of sweeping new tariffs, effectively igniting a global trade war. China swiftly responded with 34% reciprocal duties on U.S. imports, intensifying fears of a global recession. In the immediate aftermath, the S&P 500 shed over 10%, while the FTSE 100 fell more than 6%, marking the worst two-day period for global equities since the onset of the COVID-19 pandemic in 2020.
Morgan Stanley noted that U.S. long-short equity hedge funds began unwinding positions even before the official tariff announcement, suggesting that institutional players were bracing for heightened volatility. Export-driven Asian markets bore the brunt of the initial selloff, exacerbating pressure on hedge funds heavily exposed to cyclical and international equities.
Leverage metrics reflect this pivot. Morgan Stanley’s estimate of 37% net leverage, down from over 50% at the start of the year, indicates a significant retreat from risk. A similar note from JPMorgan confirms the trend, stating that hedge fund net leverage is now hovering near its lowest levels since late 2023. Net leverage, defined as the ratio of a fund’s net long exposure relative to total assets including borrowed capital, is a key gauge of a fund’s risk posture. A drop to these levels suggests an environment dominated by risk aversion and liquidity management.
Notably, Hong Kong’s Hang Seng Index recorded its steepest one-day drop since 1997, underscoring the systemic nature of the current market stress. Broad commodity weakness has further fueled the bearish sentiment, with oil prices tumbling to a four-year low on Monday. The combination of geopolitical uncertainty, slowing global trade, and fears of inflationary spillover is complicating the macro outlook for hedge funds and asset managers alike.
Eddie Tam, CIO of Central Asset Investments in Hong Kong, noted that the global equity selloff has thus far unfolded in a relatively orderly fashion—a detail that may point to more turbulence ahead. With volatility still rising and margin calls accelerating in several jurisdictions, many funds appear to be adopting a “risk-off” strategy until visibility improves.
For investors and traders, the key takeaway is clear: the sharp drop in hedge fund leverage signals reduced market liquidity and growing fragility in asset pricing. As tariff headlines continue to dominate the macro narrative, caution remains warranted, particularly in sectors sensitive to global trade dynamics and interest rate expectations.