Hedge funds suffer worst losses after ‘Deliverance Day’ on Iran war turmoil

Hedge funds are being battered by the fallout from the escalating conflict with Iran, a sharp rise in oil prices and a broader market sell-off unleashing crowded trades.

“Hedge funds suffered their worst declines since the start of the conflict, Liberation Day,” wrote in a recent note led by Nicolas Panigirtzoglou, global markets strategist at JP Morgan. “Liberation Day” is the phrase US President Donald Trump used last April to roll out a set of tariffs on various countries.

Rapid changes in equities, currencies and commodities force investors to unwind positions across global markets. The sale marks a rare moment when traditional diversification within the hedge fund universe offers little protection.

Ahead of the conflict, many hedge funds were exposed to global growth, with overweight positions in equities and emerging markets, along with bets against the US dollar. Those transactions are now unraveling rapidly.

“Markets are generally risk-off, with many trading on fears of inflation or the possibility of a negative growth shock from higher oil prices,” said Kathryn Kaminsky, chief research strategist at Alpha Simplex.

JP Morgan He noted that previously crowded bets against the dollar, particularly in emerging markets, were quickly removed, removing a major source of support for risk assets.

The MSCI world index fell more than 3% since the war began on February 28. The US dollar index has strengthened by about 2% over the same period.

“Most hedge funds have reasonable exposure to growth risk and equity markets so they should expect to struggle in this environment,” added Kaminsky.

So far, strategies tied closely to stocks have suffered the most. JP Morgan says equities are “more vulnerable than bonds from a positioning perspective”, suggesting investors have yet to fully unravel the risk.

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% year-to-date in March, compared with a roughly 2.2% decline for the industry as a whole, according to the latest data provided by Hedge Fund Research (HFR).

More surprisingly, strategies normally seen as beneficiaries of volatility are also struggling.

“Surprisingly, both global macro and commodity trading advisors (CTAs) are underperforming,” said Dan Steinbrugh, founder and CEO of alternative investment advisory firm Agecroft Partners.

Global macro is down 3%, 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 down 3% since the start of the war, according to HFR data.

“In general, these strategies work best when volatility is high and uncorrelated with equity markets,” Steinbrugh told CNBC.

The breakdown in traditional relationships reflects the unusual nature of the current shock, industry experts said. Although oil prices rose amid disruptions to tanker traffic through the Strait of Hormuz, the impact on the broader market was complicated by fears of inflation and a hit to global growth.

JPMorgan highlighted that the oil shock is behaving differently than previous cycles. In general, higher crude prices increase the income of oil-exporting countries, and some of that money is reinvested in global markets such as stocks and bonds.

“In general … higher oil prices boosted the incomes of oil-producing countries … (and get) recycled into foreign assets,” JPMorgan strategists said.

That may have helped soften the blow for investors. At the moment, disruptions to shipping lines are disrupting those flows and reducing the amount of money flowing back into financial markets, eliminating an important source of cash flows, the bank noted.

Still, turbulence does not affect all funds equally. Large multi-strategy platforms that spread risk across multiple trading styles have fared better than more directional funds.

“Large multi-strategy platforms should hold up well in short sales in the industry because they tend to have less market exposure,” Steinbrugh said.

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

As for hedge funds, it now depends on how long the conflict and oil disruption will last, experts said.

If tensions ease and shipping lines normalize, markets may stabilize and losses prove temporary.

But if the situation drags on, higher energy prices could begin to weigh heavily on the global economy, hurting consumers, slowing growth and putting markets under pressure.

“If geopolitical risks persist, redemptions are likely to increase as some investors seek safety,” said Noah Hammon, chief executive of AdvisorShares.

Meanwhile, JP Morgan believes that equities look more vulnerable than bonds from a positioning perspective in both developed and emerging markets.