A monitor displays stock market information on the floor of the New York Stock Exchange on April 4, 2025.
Michael Nagle | Bloomberg | Getty Images
Hedge funds are getting battered by the fallout from the escalating conflict with Iran, as a sharp spike in oil prices and a broad market selloff unravel crowded trades.
“Since the start of the conflict, hedge funds have experienced their worst drawdowns since Liberation Day,” JPMorgan’s global markets strategists led by Nikolaos Panigirtzoglou wrote in a recent note. “Liberation Day” was a phrase used by U.S. President Donald Trump to roll out a set of tariffs on various countries last April.
This comes as rapid shifts in equities, currencies and commodities forced investors to unwind positions across global markets. The selloff marks a rare moment when traditional diversification within the hedge fund universe has offered little protection.
In the run-up to the conflict, many hedge funds had built up exposure to global growth, including overweight positions in equities and emerging markets, alongside bets against the U.S. dollar. Those trades are now unwinding quickly.
“Markets have generally been risk-off, with many trading on inflation fears or even the potential for a negative growth shock from increased oil prices,” said Kathryn Kaminski, chief research strategist at AlphaSimplex.
JPMorgan noted that previously crowded bets against the dollar, particularly in emerging markets, have been rapidly unwound, removing a key source of support for risk assets.
The MSCI World Index saw a decline of over 3% since the start of the war on Feb. 28 after striking a record high in early February. The U.S. dollar index strengthened around 2% across the same period of time.
The MSCI World Index’s performance since the start of the year
“Since most hedge funds have reasonable exposure to growth risk and equity markets they should be expected to struggle in this environment,” Kaminski added.
So far, strategies tied closely to stocks have been hit the hardest. JPMorgan said equities appear “more vulnerable than bonds from a positioning perspective,” suggesting that investors have yet to fully unwind risk.
Long/short equity funds, a core hedge fund strategy that bets on stocks going up or down, are among the worst performers this month. They’ve fallen about 3.4% so far in March, compared with a roughly 2.2% drop for the industry overall, according to the latest data provided by Hedge Fund Research (HFR).
More surprisingly, strategies typically seen as beneficiaries of volatility have also struggled.
A different kind of oil shock
“Surprisingly, both global macro and commodity trading advisors (CTA) are both doing poorly,” said Don Steinbrugge, founder and CEO of alternative investment consulting firm Agecroft Partners.
According to HFR data, global macro is down 3% and a proxy for the CTA index — which tracks trend-following hedge funds that use algorithms to trade markets like commodities, currencies and bonds — is also down around 3% since the start of the war.
“Typically, these strategies do well when volatility increases and tend to not be correlated with the equity markets,” Steinbrugge told CNBC.
That breakdown in traditional relationships reflects the unusual nature of the current shock, said industry veterans. While oil prices have surged amid disruptions to tanker traffic through the Strait of Hormuz, the broader market impact has been complicated by inflation fears and concerns about a hit to global growth.
JPMorgan highlighted that the oil shock is also behaving differently from past cycles. Normally, higher crude prices boost the revenues of oil-exporting nations, and some of that money gets reinvested into global markets like stocks and bonds.
“Typically … higher oil prices increased the revenues of oil producing countries … [and get] recycled into foreign assets,” said JPMorgan strategists.
That may have helped soften the blow for investors. This time, disruptions to shipping routes are interrupting those flows and that reduces the amount of money flowing back into financial markets, removing a key source of cash flows, the bank noted.
Still, the turbulence is not affecting all funds equally. Large multi-strategy platforms, which spread risk across multiple trading styles, have so far held up better than more directional funds.
“The large multi-strategy platforms should hold up well given minor sell offs in the industry because they tend to have little market exposure,” said Steinbrugge.
What happens next?
The losses come as hedge funds landed their biggest annual gain in 16 years in 2025, with equity strategies and thematic macroeconomic funds reported to have led the charge.
For hedge funds, much now depends on how long the conflict and the oil disruption lasts, experts said.
If tensions ease and shipping routes normalize, markets could stabilize and losses may prove temporary.
But if the situation drags on, higher energy prices could start to weigh more heavily on the global economy, hurting consumers, slowing growth, and keeping markets under pressure.
“If geopolitical risks continue, it is likely that redemptions could pick up as some investors seek safety,” said Noah Hamman, chief executive of AdvisorShares.
Meanwhile, JPMorgan believes equities look more vulnerable than bonds from a positioning perspective both in developed and emerging markets.