Hedge funds suffer worst drawdown since 2022 as volatility hits markets

Hedge funds hit by worst drawdown in years as volatility forces de-risking.Summary:Hedge funds suffer worst monthly drawdown since January 2022

Fundamental long/short strategies hit hardest across all regions

Asia-focused funds lead losses, followed by Europe and US

Volatility from Iran war and cross-asset moves drove de-risking

Systematic strategies outperform as discretionary funds struggle
Global hedge funds endured their worst monthly performance in over four years in March, as heightened volatility tied to the Iran conflict and broader cross-asset dislocations triggered widespread losses across discretionary strategies.According to Goldman Sachs prime brokerage data, fundamental long/short equity funds declined by just over 5% on average during the month, marking the steepest drawdown since early 2022. The weakness was broad-based across regions, with Asia-focused funds leading losses, followed by Europe and the United States.The sell-off comes against a backdrop of rising geopolitical tensions, sharp moves in interest rates, currencies and commodities, and increasingly unstable equity factor rotations. These conditions forced hedge funds to rapidly reduce risk, exacerbating losses and exposing crowded positioning across portfolios.Equity markets themselves posted moderate declines over the quarter, but the more significant impact on hedge funds stemmed from positioning and leverage. Funds continued to unwind global equity exposure at the fastest pace in over a decade, with net selling accelerating and short positions outweighing long additions, particularly in North America.Technology, media and telecommunications stocks were among the worst-hit sectors, reflecting broader weakness in growth and high-beta exposures. Larger multi-manager platforms, which typically rely on diversified strategies and higher leverage, saw outsized drawdowns relative to peers, highlighting the vulnerability of “pod shop” models in periods of rapid correlation shifts.In contrast, systematic and quantitatively driven strategies posted gains during the month, benefiting from directional trends and alpha generation independent of broader market declines. This divergence underscores a growing split between discretionary stockpickers and model-driven approaches in volatile environments.Leverage levels remained elevated, hovering near record highs, which amplified the impact of market moves and forced deleveraging. The episode highlights how quickly conditions can deteriorate when volatility rises and correlations spike, even for diversified hedge fund portfolios.Despite the sharp monthly losses, performance across the first quarter remains mixed, with some regions and strategies still in positive territory. However, March’s drawdown serves as a clear reminder of the sensitivity of hedge fund strategies to geopolitical shocks and rapid market regime shifts.—Ackman sees some hope (this posted earlier this week)
This article was written by Eamonn Sheridan at investinglive.com.

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