High Oil Prices Shock Market as Global Hedge Funds Face Worst Drawdown Since "Liberation Day" Tariffs

AI Inquiry · What are the unique impacts of this oil price shock on financial market liquidity?

Cailian Press, March 18 (Editor: Xia Junxiong) Due to the ongoing escalation of the Iran conflict, international oil prices surged significantly, triggering a chain reaction in financial markets. Global hedge funds are suffering heavy losses.

JPMorgan Global Market Strategist Nikolaos Panigirtzoglou and his team stated in a recent report: “Since the conflict erupted, hedge funds have experienced their worst drawdown since ‘Liberation Day’.”

The term “Liberation Day” was used by U.S. President Donald Trump, who in early April last year imposed tariffs on nearly all trading partners, calling it “reciprocal tariffs.”

Since the outbreak of the Iran conflict, sharp volatility in stocks, forex, and commodities markets has forced investors worldwide to unwind positions. The sell-off involved a wide range of asset classes, rendering hedge fund diversification strategies nearly ineffective at providing protection.

Before the conflict, many hedge funds bet on global economic growth, including overweight positions in stocks and emerging market assets, while shorting the dollar. However, these positions are now being rapidly closed.

Kathryn Kaminski, Chief Research Strategist at AlphaSimplex, said: “The market as a whole is in risk-averse mode, with many trades centered around inflation concerns, and even fears that rising oil prices could trigger negative growth shocks.”

JPMorgan pointed out that previous concentrated bets on shorting the dollar (especially in emerging markets) are being quickly unwound, weakening an important support for risk assets.

Since the war began on February 28, the MSCI Global Index has fallen over 3%, after reaching a record high in early February; during the same period, the US dollar index has risen about 2%.

Kaminski added: “Given that most hedge funds have some exposure to economic growth and equities, it’s inevitable they face pressure in the current environment.”

Currently, strategies highly correlated with stocks are the most impacted. JPMorgan noted that “stocks are more vulnerable than bonds,” indicating investors have not fully de-risked.

Equity long/short strategies (one of hedge funds’ core strategies, profiting from simultaneous long and short positions) have been among the worst performers this month.

According to the latest data from hedge fund research firm HFR, these funds have declined about 3.4% so far in March, compared to an industry average drop of around 2.2%.

Even more surprisingly, strategies that typically benefit from high volatility environments also performed poorly this time.

Unusual Oil Price Shock

Don Steinbrugge, founder of alternative investment consultancy Agecroft Partners, said: “Surprisingly, global macro strategies and CTA (Commodity Trading Advisor) strategies have performed poorly.”

HFR data shows that since the war began, global macro strategies have fallen about 3%; a CTA index, which tracks trend-following hedge funds using algorithms across commodities, forex, and bonds, has also declined about 3%.

“Typically, these strategies perform well during rising volatility and have low correlation with equities,” Steinbrugge noted.

Industry insiders point out that this “breakdown” of traditional relationships reflects the uniqueness of this shock. The disruption of tanker shipping through the Strait of Hormuz has driven up oil prices, while inflation pressures and concerns over a slowdown in global growth have made the overall market impact more complex.

JPMorgan emphasized that this oil price shock differs from previous cycles. Usually, rising oil prices increase revenues for oil-producing countries, and some of these funds flow back into global equities and bonds.

However, this time, due to shipping disruptions in the Strait of Hormuz, this capital cycle has been interrupted, reducing the flow of funds back into financial markets and weakening a key source of liquidity.

HFR President Ken Heinz said: “The current situation is changing too rapidly to determine whether this is just a short-term fluctuation or the beginning of a longer-term trend. If I had to sum up the current hedge fund industry sentiment, it would be ‘Now we are all oil traders.’”

What’s Next?

At the time of these losses, hedge funds just recorded their largest annual gain in 16 years in 2025, with equity and thematic macro strategies performing especially well.

Experts say the key moving forward depends on how long the conflict lasts and the extent of oil supply disruptions.

If tensions ease and shipping normalizes, markets could stabilize, and current losses may be short-lived.

But if the situation persists, high energy prices will more clearly drag down the global economy, manifesting as reduced consumption, suppressed growth, and ongoing market pressure.

Noah Hamman, CEO of AdvisorShares, said: “If geopolitical risks continue, investors may accelerate redemptions and shift to safer assets.”