Hedge funds have been severely impacted by the escalation of the Iran conflict, as a surge in oil prices and a broad market sell-off caused crowded trades to unravel. Since the conflict began, hedge funds have experienced their most significant losses since "Liberation Day," according to a recent report. Rapid price swings across equities, currencies, and commodities have forced investors to unwind positions globally. This selling frenzy highlights a rare moment where traditional diversification strategies within the hedge fund sector have offered little protection.
Prior to the outbreak of conflict, many hedge funds had increased their exposure to global growth assets, including overweight positions in equities and emerging markets, alongside short positions on the US dollar. These trades are now being rapidly unwound. A widespread risk-off sentiment has taken hold, with many traders concerned about inflation and the potential negative growth shock from rising oil prices. Significant short-dollar bets, particularly in emerging markets, have been quickly closed, removing a key source of support for risk assets.
Since the conflict began on February 28th, the MSCI World Index has fallen over 3%, after reaching a record high in early February. Over the same period, the US Dollar Index has risen approximately 2%. Given that most hedge funds maintain significant exposure to growth risks and equity markets, they are expected to struggle in this environment. Strategies closely tied to equities have been hit the hardest so far. From a positioning perspective, equities appear more vulnerable than bonds, suggesting investors have not yet fully de-risked.
Long/short equity funds, a core hedge fund strategy that bets on stock prices rising or falling, have been among the worst performers this month. Data shows these funds are down approximately 3.4% for March, compared to a decline of about 2.2% for the overall industry. Surprisingly, strategies typically seen as beneficiaries of volatility have also performed poorly. Both global macro and Commodity Trading Advisor (CTA) funds, which track trends in commodities, currencies, and bonds, have declined around 3% since the war began. These strategies usually perform well during periods of increased market volatility and are often uncorrelated to equities.
Industry veterans note that the breakdown of these traditional relationships reflects the unique nature of the current shock. While the disruption of oil tanker traffic through the Strait of Hormuz has caused oil prices to spike, broader market impacts are complicated by inflation fears and concerns over hampered global growth. This oil crisis differs from previous cycles. Typically, rising crude prices boost revenues for oil-exporting nations, with a portion of that capital being reinvested into global markets like stocks and bonds, which can help cushion investor losses. This time, however, disruptions to shipping routes are hindering these capital flows, reducing the amount of money recycled back into financial markets and cutting off an important source of liquidity.
The overall situation remains highly fluid, making it difficult to determine if this is a short-term disruption or the beginning of a longer period of turbulence. The sentiment across the hedge fund industry could be summarized as, "Now, we are all oil traders." The turmoil has not impacted all funds equally. Large, multi-strategy platforms, which spread risk across various trading styles, have so far outperformed more directional funds. Given the modest sell-off within the industry, these large platforms are expected to navigate the environment well due to their typically lower net market exposure.
What happens next? While hedge funds posted their largest annual gains in 16 years for 2025, equity strategies and thematic macro funds led that growth. Experts now say the fate of hedge funds largely depends on how long the conflict and oil supply disruptions persist. If tensions ease and shipping routes normalize, markets could stabilize, and losses may prove temporary. However, if the situation continues, rising energy prices could place a heavier burden on the global economy, hurting consumers, slowing growth, and keeping markets under pressure. If geopolitical risks persist, some investors may seek safety, potentially leading to increased redemptions. Meanwhile, analysis suggests that from a positioning standpoint, equities in both developed and emerging markets remain more vulnerable than bonds.