Iran Situation Devastates Markets, Global Hedge Funds Suffer Worst Losses Since "Tariff Day"

Iran conflict continues to escalate, causing oil prices to surge sharply and triggering a global market sell-off, pulling hedge funds into a widespread loss storm.

According to Nikolaos Panigirtzoglou, head of the Global Market Strategy team at J.P. Morgan, in a recent report, “Since the outbreak of the conflict, hedge funds have experienced their worst drawdown since April last year.” Data shows that since the conflict began on February 28, the MSCI Global Index has fallen over 3%, significantly retreating from its all-time high in early February; during the same period, the US dollar index has strengthened about 2%.

The synchronized turbulence across multiple asset classes makes this sell-off particularly challenging. According to the latest data from Hedge Fund Research (HFR), the entire industry has declined about 2.2% since March, with equity-related long/short strategies falling approximately 3.4%, one of the worst performers; global macro strategies and Commodity Trading Advisor (CTA) strategies, typically seen as beneficiaries of rising volatility, have also declined about 3%. This sell-off marks a rare moment—traditional diversification within hedge funds has almost failed to provide effective protection.

The root of these losses lies in the fact that many hedge funds had previously built concentrated exposures to global economic growth, including overweight positions in stocks and emerging markets, and bets on a weakening dollar. These positions are now being forced to unwind rapidly.

Margin Calls Hit Risk Assets

Before the conflict, shorting the dollar was one of the most crowded trades among hedge funds, especially focused on emerging markets. J.P. Morgan notes that the rapid reversal of these positions has removed a key support for risk assets.

Kathryn Kaminski, Chief Research Strategist at AlphaSimplex, said, “The market is generally in risk-averse mode, with many traders pricing in inflation risks and the potential negative growth shocks from rising oil prices.” “Since most hedge funds have significant exposure to growth risks and the stock market, it’s expected that they are under pressure in the current environment,” she added.

J.P. Morgan’s report indicates that, from a positioning perspective, both developed and emerging markets’ equities face greater downside than bonds, suggesting that investors have not fully closed out their risk positions yet. HFR President Ken Heinz summarized the current industry sentiment in one sentence:

“If I had to sum up the entire hedge fund industry’s mood, it would be—right now, we’re all oil traders.”

Oil Price Shock Disrupts Traditional Transmission Logic

The reason this oil price shock caught markets off guard is due to key differences in its transmission path compared to past energy crises. The blockage of tanker traffic through the Strait of Hormuz has disrupted the usual mechanism of oil-exporting countries recycling oil revenues into global assets.

“Typically, rising oil prices increase the income of oil-producing countries, which is then reinvested into overseas assets,” J.P. Morgan strategists wrote in the report. However, this time, the disruption of shipping routes is blocking this capital flow mechanism, reducing the total inflow into financial markets and removing a critical source of liquidity.

Surprisingly, global macro and CTA strategies failed to extend their traditional advantage during market turmoil. Don Steinbrugge, founder and CEO of Agecroft Partners, told CNBC, “Usually, these strategies perform well during volatility increases and have low correlation with equities.” The simultaneous underperformance across multiple strategies reflects the abnormal nature of the current shock—combining inflation pressures with global economic slowdown risks, causing asset pricing to become highly confused.

Multi-Strategy Platforms Show Relative Resilience

Despite the turbulence sweeping through most strategies, the pressure on different funds varies. Large multi-strategy platforms, relying on cross-style risk diversification, currently demonstrate relative robustness.

Steinbrugge noted, “Large multi-strategy platforms should be able to remain relatively stable during minor market declines because they typically have minimal directional exposure.” In contrast, more directional strategy funds are bearing the brunt of the pressure.

It’s worth noting that this loss comes shortly after hedge funds posted their best annual performance in 16 years—the industry saw a record high in 2025, with equity strategies and thematic macro funds reportedly contributing most of the gains.

Future Outlook Depends on Duration of Conflict

Industry experts generally believe that the future of hedge funds will largely depend on how long the Iran conflict persists and the extent of its impact on energy supplies.

If tensions ease and shipping routes are restored, markets could stabilize, and current losses may be only short-term corrections. However, if the conflict drags on, elevated energy prices will continue to weigh on global consumers, slow economic growth, and prolong market pressure. Noah Hamman, CEO of AdvisorShares, warned, “If geopolitical risks persist, and investors shift toward safe-haven assets, redemption pressures are likely to intensify.”

J.P. Morgan maintains its view that, from a positioning standpoint, stocks in both developed and emerging markets are more vulnerable than bonds. Ken Heinz of HFR admitted, “The overall situation is changing too rapidly; it’s too early to tell whether we are experiencing short-term volatility or the beginning of a longer-term trend.”

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