Hedge funds are rapidly liquidating their stock positions, with some offloading nearly all of their holdings, as U.S. President Donald Trump’s escalating trade war has wiped out trillions in market value. This has prompted many investors to scale back their reliance on borrowed cash for trading, further intensifying the market turmoil.
In the three trading days following Trump’s announcement of broad reciprocal tariffs, global stock markets have plunged, while bonds have become both a safe haven and a bet on potential rate cuts by the Federal Reserve. The volatility has upended market assumptions that prevailed before Trump took office.
The selloff on Wall Street has been swift and brutal, with investors who had previously bet on the resilience of the U.S. economy fleeing in droves. The S&P 500 index saw a dramatic 10.5% drop over two days, losing approximately $5 trillion in market value. Meanwhile, China’s CSI300 blue-chip index fell by more than 5%, and the pan-European STOXX index has dropped nearly 12% from its all-time high set in early March, entering correction territory.
William Xin, chairman of the Shanghai-based hedge fund Spring Mountain Pu Jiang Investment Management, revealed that he had liquidated all of his stock holdings. “The macro picture is getting very chaotic, and I cannot see the future clearly at all,” said Xin, who sold his shares in China and Hong Kong last Thursday ahead of a public holiday.
Hedge funds that employ a long-short equity strategy have been particularly hard hit by the spike in market volatility. According to analysts at J.P. Morgan, net leverage by hedge funds fell by 5-6% last week, bringing it to its lowest level since late 2023. The bank also forecast that volatility-targeting portfolios would need to sell between $25 billion and $30 billion in equities to reduce risk, with levered exchange-traded funds (ETFs) needing to sell an additional $23 billion, primarily in tech stocks.
Hedge funds often use margin accounts, borrowing money from prime brokers to trade. When the value of their holdings drops below the required margin, brokers can force them to either inject more cash or sell off stocks and bonds. This forced selling has even affected gold, a traditional safe-haven asset, which has sharply declined since Trump’s announcement of new tariffs on April 2.
“In market selloffs like this, panic and forced selling due to margin calls can dominate,” said David Seif, chief economist for developed markets at Nomura in New York. “While these tariffs are a very real negative event, the selloff can take on a life of its own.”
Bob Zhang, managing partner of Beijing-based hedge fund Pine Street Capital, shared that he has reduced his exposure to Chinese stocks from 100% in January to just 25% today, adding hedges to protect against further downside risk. “The volatility in China might just be starting, as positions are very crowded, and some people are trying to catch a falling knife,” Zhang said.
Although Chinese investors may be less affected by margin calls due to a strong market earlier this year, China is still one of the primary targets of Trump’s tariffs. The Hong Kong tech sub-index has plunged over 27% in the past month, bringing it back to the level it was at the start of the year.
As the U.S. slaps tariffs of more than 50% on Chinese goods, China has retaliated with additional levies on U.S. imports. “Too many uncertainties around, and everyone is de-grossing given the elevated market volatility,” said a portfolio manager at a large U.S. multi-strategy fund based in Hong Kong. “I think we are just in the middle of this selloff. This position unwinding will sequentially affect one hedge fund after another.”
In China, outstanding margin finance remains high at 1.9 trillion yuan ($260 billion) as of April 3, while in South Korea, where a short-selling ban was recently lifted, data shows $19.15 million worth of stock sales between April 1 and 3 were triggered by margin calls—more than double the amount for all of March, the highest level since September 2023.
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