Iran situation hammers the market; global hedge funds suffer worst losses since "Tariff Day"

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The conflict in Iran continues to escalate, with oil prices surging sharply and global markets selling off in tandem, dragging hedge funds into a full-blown storm of losses.

According to Nikolaos Panigirtzoglou, head of JPMorgan's global market strategists team, "Since the outbreak of the conflict, hedge funds have experienced the most severe drawdown since April last year." Data shows that since the conflict began on February 28, the MSCI World Index has dropped more than 3%, a significant pullback from its historical high touched in early February this year; the dollar index has strengthened about 2% over the same period.

The simultaneous shakeup across multiple asset classes makes this round of selloff particularly tricky. According to the latest data from Hedge Fund Research (HFR), the industry as a whole has declined about 2.2% since March, with long/short equity strategies—which are highly correlated with stocks—down about 3.4%, making them among the worst performers. Global macro strategies and commodity trading advisors (CTA), typically considered beneficiaries of increased volatility, have also dropped about 3%. This selloff marks a rare moment—where traditional diversification in the hedge fund realm has barely offered effective protection.

The root cause of these losses lies in the concentrated exposures to global economic growth built up by many hedge funds prior to the conflict, including overweighting equities and emerging markets, and betting on a weaker dollar. These positions are now being rapidly unwound.

Wave of Liquidations Hits Risk Assets

Before the conflict erupted, shorting the dollar was one of the most crowded trades among hedge funds, especially in emerging markets. JPMorgan notes that the swift reversal of these positions has withdrawn an important source of support for risk assets.

Kathryn Kaminski, Chief Research Strategist at AlphaSimplex, said, "The market is generally in risk-off mode; many traders are pricing in inflation risks and even negative growth shocks that rising oil prices could trigger." "Since most hedge funds have a fair degree of exposure to growth risks and equity markets, coming under pressure in the current environment is no surprise," she added.

JPMorgan's report indicates that, from a positioning perspective, whether in developed or emerging markets, equities face greater downside pressure than bonds, suggesting investors have not completed a full liquidation of their risk positions. HFR President Ken Heinz summarized the industry's mindset in one sentence:

"If I were to sum up the sentiment of the whole hedge fund world—right now, we are all oil traders."

Oil Price Shock Disrupts Conventional Transmission Logic

This oil price shock caught the market off guard because its transmission path is fundamentally different from previous energy crises. The disruption of tanker traffic in the Strait of Hormuz has broken the usual mechanism whereby oil-exporting countries recycle oil revenues into global assets.

"Normally, rising oil prices increase the income of oil-producing countries, and those funds are then reinvested in overseas assets," JPMorgan strategists wrote in the report. This time, however, the interruption of shipping routes is cutting off this capital return mechanism, reducing the total inflow of funds into financial markets, and removing a key source of liquidity.

What has surprised the industry is that global macro and CTA strategies have failed to maintain their traditional advantages during market turmoil. Don Steinbrugge, founder and CEO of Agecroft Partners, told CNBC, "Usually these strategies perform well when volatility rises and have low correlation with equities." This time, multiple strategies have been hit simultaneously, reflecting the exceptional nature of this shock—inflationary pressure and downside risk for global economic growth coexist, creating confusion in the pricing logic of various assets.

Multi-Strategy Platforms Show Relative Resilience

Though this round of turbulence has swept most strategies, the pressure borne by different funds is not the same. Large multi-strategy platforms, relying on risk diversification across trading styles, are now showing relative resilience.

Don Steinbrugge pointed out, "Large multi-strategy platforms should be able to remain relatively resilient during the industry's slight decline, because they typically have minimal directional exposure." In contrast, funds with strong directional strategies were hit hardest.

It's worth noting that these losses came just after hedge funds had completed their best annual performance in 16 years—the industry saw its biggest gains in 16 years during 2025, with equity strategies and thematic macro funds reportedly contributing most of the gains.

Future Direction Depends on Duration of Conflict

Industry insiders generally believe that the fate of hedge funds going forward will largely depend on how long the Iran conflict lasts and how deeply it impacts energy supply.

If the situation eases and shipping routes return to normal, the market could stabilize, and current losses might only be a short-term correction. But if the conflict drags on, persistently high energy prices will continue to squeeze global consumers and drag down economic growth, prolonging the time the market stays under pressure. Noah Hamman, CEO of AdvisorShares, warned that "if geopolitical risks persist, redemption pressure will likely intensify as some investors turn to safe-haven assets."

JPMorgan currently maintains its view—that from a positioning perspective, equities in both developed and emerging markets are more vulnerable than bonds. HFR President Ken Heinz admitted, "The overall situation is changing too rapidly; we can't tell yet whether we are in the midst of a short-term fluctuation or at the beginning of a longer-term trend."

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