According to data from State Street, indicators for institutional investor behavior in March show a move towards portfolio hedging, yet with notable nuances. Unlike previous defensive cycles, investors this month increased their holdings in US stocks. Concurrently, they did not raise their US dollar hedges but instead reduced them.

Overall risk exposure declined in March, with the allocation to equity assets falling by 1.6 percentage points, marking the largest monthly decrease since August 2023. Despite this pullback, institutional investors maintained a significantly overweight position in stocks. Capital leaving the equity market was primarily redirected into cash-like assets, increasing their allocation by 1 percentage point, while fixed income allocations rose by 0.6 percentage points.

Michael Metcalfe, Global Head of Macro Strategy at State Street, commented, "By the end of February, institutional investors' allocation to equities had reached a two-decade high. As anticipated, following the outbreak of conflict in the Middle East, March saw widespread defensive maneuvers across and within asset classes. Funds flowed out of equities, predominantly into cash."

"The overall decline in equity allocation was the largest in over 32 months, yet this appeared to be a controlled hedging process rather than a panic sell-off. The 1.6 percentage point reduction in stock allocation throughout March was only about one-third the scale of the panic-driven adjustments seen in the early stages of the COVID-19 pandemic. Within equities, capital flowed back into US stocks and the technology sector, which are perceived as less vulnerable to energy shocks. Simultaneously, funds exited European and emerging markets, viewed as more exposed. This dynamic is somewhat atypical, as investors typically sell their most overweight assets during shocks; this time, however, money moved back into US equities, which remain the largest overweight position."

The reaction in the forex market also diverged from past patterns. During a similar period of sustained defensive positioning last year, institutional investors consistently hedged their US dollar exposure, shifting the dollar from an overweight to an underweight position. The pattern in March was markedly different. Starting the month significantly underweight the US dollar, investors were net buyers of the currency throughout the period. This suggests that during the market volatility triggered by the Middle East conflict, institutional investors treated the US dollar as a safe-haven asset—a stark contrast to their behavior during the market turbulence following the announcement of the 'Tax Freedom Day' tariffs in April of the previous year.