Hedge funds are being weighed down by the fallout from the escalating conflict with Iran, as a sharp rise in oil prices and a broader market selloff crowded out trading.
“Since the beginning of the conflict, hedge funds have experienced their worst decline since Liberation Day,” JPMorgan global market strategists led by Nikolaos Panigartzoglou wrote in a recent note. “Liberation Day” was a phrase used by US President Donald Trump last April to impose a set of tariffs on various countries.
It comes as rapid swings in equities, currencies and commodities have forced investors to reduce positions in global markets. The selloff marks a rare moment when traditional diversification within the hedge fund universe has provided little protection.
Before the conflict, many hedge funds had increased investments in global developments, including bets against the US dollar as well as overweight positions in equities and emerging markets. Those businesses are now opening rapidly.
“The market has been generally risk-on, with many trading on inflation fears or even the possibility of a negative growth shock from higher oil prices,” said Katherine Kaminsky, chief research strategist at AlphaSimplex.
JP Morgan noted that previously crowded bets against the dollar, particularly in emerging markets, have rapidly evaporated, eliminating a key source of support for risk assets.
The MSCI World Index fell more than 3% since the start of the war on February 28 after hitting a record high in early February. The US dollar index strengthened by about 2% over the same period.
MSCI World Index performance since the beginning of the year
“Since most hedge funds have growth exposure and reasonable exposure to equity markets, they should be expected to struggle in this environment,” Kaminsky said.
So far, strategies related to shares have been affected the most. JPMorgan said equities appear “more vulnerable than bonds from a positional perspective”, suggesting investors have still not fully de-risked.
Long/short equity funds, a core hedge fund strategy that bets on stocks going up or down, were among the worst performers this month. They have fallen about 3.4% so far in March, compared with a decline of about 2.2% for the industry as a whole, according to the latest data provided by Hedge Fund Research (HFR).
More surprising is that strategies typically seen as beneficiaries of volatility have also struggled.
A different kind of oil shock
“Surprisingly, both global macro and commodity trading advisors (CTAs) are underperforming,” said Don Steenbrugge, founder and CEO of alternative investment advisory firm Edgecroft 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 in markets such as commodities, currencies and bonds – is also down about 3% since the start of the war.
“Generally, these strategies perform well when volatility increases and is not correlated with equity markets,” Steenbrugge told CNBC.
If I had to summarize the sentiment of the hedge fund world it’s ‘Right now, we’re all oil traders.
ken heinz
hedge fund research
Industry leaders said the breakdown of traditional relationships reflects the unusual nature of the current shock. Whereas Oil prices rose amid disruptions to tanker traffic through the Strait of Hormuz, a broader market impact compounded by inflation fears and worries about the impact on global growth.
JPMorgan highlighted that the oil shock is also behaving differently from past cycles. Generally, higher crude oil prices increase the revenues of oil exporting countries, and some of that money gets reinvested in global markets such as stocks and bonds.
“In general… higher oil prices increase revenues for oil-producing countries… (and) this is recycled into foreign assets,” JPMorgan strategists said.
This would have helped mitigate the blow to investors. This time, disruption to shipping routes is disrupting those flows and reducing the amount of money flowing back into financial markets, eliminating a key source of cash flow, the bank said.
“The overall situation is too fluid to determine whether we are in a short-term period of volatility or the beginning of a longer-term period,” said HFR President Ken Heinz. “If I had to summarize the sentiment of the hedge fund world it’s ‘Right now, we’re all oil traders.'”
Still, the turmoil is not affecting all funds equally. Large multi-strategy platforms, which spread risk across multiple trading styles, have fared better than more directional funds.
“Larger multi-strategy platforms should hold up well given the modest selloff in the industry because they have less market exposure,” Steenbrugge said.
what happens next?
Losses come in the form of hedge funds achieved their biggest annual gain in 16 years in 2025, with equity strategies and thematic macroeconomic funds leading the gains.
For hedge funds, much now depends on how long the conflict and oil disruptions last, experts say.
If tensions ease and shipping routes return to normal, markets may stabilize and losses may prove temporary.
But if the situation drags on, higher energy prices could weigh heavily on the global economy, hurting consumers, slowing growth and putting markets under pressure.
“If geopolitical risks persist, it’s likely that redemptions could accelerate as some investors seek safety,” said Noah Hamman, chief executive of AdvisorShares.
Meanwhile, JPMorgan believes equities look more vulnerable than bonds from a situational perspective in both developed and emerging markets.
