Hedge funds suffer worst losses since ‘Liberation Day’ amid Iran war turmoil

Hedge funds have been hit by the fallout from the escalating conflict with Iran, as a surge in oil prices and a broader market selloff unwinds a crowded trade.

“Since the conflict began, hedge funds have experienced their worst drawdown since Liberation Day,” JPMorgan’s global market strategists led by Nikolaos Panigirtzoglou wrote in a recent note. “Liberation Day” was the phrase used by US President Donald Trump last April when he imposed a series of tariffs on countries.

This comes after investors were forced to unwind positions across global markets due to rapid changes in stocks, currencies and commodities. The decline marks a rare moment in the hedge fund industry when traditional diversification offers little protection.

In the run-up to the conflict, many hedge funds had bet against the dollar and built up exposure to global economic growth, including overweight positions in equities and emerging markets. These deals are now rapidly unwinding.

“Markets are generally risk-off, trading on concerns about inflation and even the possibility of a negative growth shock from rising oil prices,” said Kathryn Kaminski, chief research strategist at AlphaSimplex.

JP Morgan He pointed out that the previously crowded investment in the dollar, particularly in emerging markets, was rapidly unraveling, removing an important source of support for risk assets.

After hitting a record high in early February, the MSCI World Index has fallen more than 3% since the war began on February 28. The U.S. dollar index rose about 2% during the same period.

“Most hedge funds have growth risks and moderate exposure to equity markets, so you should expect them to struggle in this environment,” Kaminsky added.

So far, strategies closely tied to stocks have been hit the hardest. JPMorgan said stocks appear to be “more vulnerable than bonds from a positioning perspective,” suggesting investors have not yet completely eliminated risk.

Long/short equity funds, a core hedge fund strategy that bets on whether stocks will rise or fall, were among the worst performers this month. According to the latest data provided by Hedge Fund Research (HFR), stocks are down about 3.4% in March, compared with a decline of about 2.2% for the industry as a whole.

Even more surprisingly, strategies commonly seen as benefiting from volatility are also struggling.

“Surprisingly, global macro markets and commodity trading advisors (CTAs) are both underperforming,” said Don Steinbrugge, founder and CEO of alternative investment consulting firm Agecroft Partners.

The global macroeconomy is down 3%, according to HFR data, and a proxy for the CTA index, which tracks trend-following hedge funds that use algorithms to trade markets such as commodities, currencies and bonds, is also down about 3% since the start of the war.

“Typically, these strategies work well when volatility increases, and they tend to be uncorrelated with the stock market,” Steinbrugge told CNBC.

Industry veterans say the breakdown in traditional relationships reflects the unusual nature of the current shock. Oil prices are soaring as tanker traffic through the Strait of Hormuz is disrupted, while the broader market impact is compounded by concerns about inflation and a hit to global growth.

JP Morgan emphasized that oil shocks are also behaving differently than in past cycles. Rising oil prices typically increase revenue for oil exporting countries, with some of that money being reinvested in global markets such as stocks and bonds.

“Typically…higher oil prices increase oil-producing countries’ revenues…[and]are recycled into overseas assets,” JPMorgan strategists said.

That may have helped soften the blow for investors. This time, the bank said disruptions to transportation routes have cut off these flows, reducing the amount of funds flowing back into financial markets and eliminating a major source of cash flow.

“The overall situation is too fluid to determine whether we are in a period of short-term instability or the beginning of something long-term,” HFR Chairman Ken Heinz said. “The sentiment across the hedge fund world can be summed up in one word: ‘Everyone is now an oil trader.'”

Still, the disruption has not affected all funds equally. Large multi-strategy platforms that spread risk across multiple trading styles have so far held up better than more directional funds.

“Large multi-strategy platforms tend to have little market exposure, so they should hold up well given some industry declines,” Steinbrugge said.

The losses come as hedge funds posted their biggest annual gain in 16 years in 2025, with equity strategies and thematic macroeconomic funds reportedly leading the way.

The big implications for hedge funds going forward will depend on how long the conflict and oil turmoil last, experts say.

Once tensions ease and shipping routes normalize, markets could stabilize and losses could be temporary.

However, if the situation persists, high energy prices could continue to weigh on the global economy, hurting consumers, slowing growth and weighing on markets.

“If geopolitical risks persist, redemptions are likely to accelerate as some investors seek safety,” said Noah Hamman, CEO of AdvisorShares.

Meanwhile, JPMorgan believes that stocks appear more vulnerable than bonds from a positioning perspective in both developed and emerging markets.