Hedge funds have experienced the "largest drawdown since April last year," especially in "long-short equity strategies" with heavy positions in Europe and South Korea.

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Hedge funds are experiencing their most severe drawdown since last year's tariff turmoil, as concentrated unwinding of crowded trades has inflicted heavy losses on this fast-money group.

According to a report released by JPMorgan strategists on Wednesday, since the outbreak of conflict in the Middle East, quantitative funds such as Commodity Trading Advisors (CTAs) have suffered their worst performance period in nearly a year. Meanwhile, long/short equity hedge funds have also recorded substantial losses due to heavy exposure to European and Korean markets and underweighting in the software sector.

Top hedge funds such as Citadel, Millennium, and Point72 suffered collective massive losses in a single week, with the worst losing up to $1.5 billion, erasing almost all gains for the year in just one week.

The ongoing escalation in the Middle East has wiped out trillions of dollars in global equity market capitalization over the past two weeks and pushed oil prices above $100 per barrel for the first time since 2022. JPMorgan strategists believe that, from a positioning perspective, equity assets are currently more vulnerable than bonds.

Multi-strategy pressure across the board, equity positions are the biggest drag

CTA funds typically track momentum in various futures markets to capture market trends.

JPMorgan, citing HFR data, reported that systematic diversified CTA funds have lost nearly 4% since March. Another index compiled by Societe Generale shows that this strategy has fallen by more than 2% so far this month.

Long/short equity strategies are also clearly under pressure. JPMorgan's HFRX Equity Hedge Index, which tracks long/short fund performance, is expected to fall by 3% this month. According to data from Goldman Sachs’ prime brokerage unit, hedge funds increased their short positions in equity ETFs by 8.3% during the week ending March 6, indicating a continued rise in risk aversion sentiment in the market.

The team led by JPMorgan strategist Nikolaos Panigirtzoglou wrote in the report that looking ahead, from a positioning perspective, equities are more vulnerable than bonds. Previously, dollar short positions were more concentrated in emerging market currencies, but appear to have mostly been closed out now.

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