The stock sell-off has billion-dollar hedge funds scrambling to cover their losses — and retail investors buying the dip — marking a stunning role reversal in the wake of President Trump’s tariff blitzkrieg.
After $5 trillion was wiped off the S&P 500 Index in just two trading days, prime brokerages have been contacting hedge fund managers to increase the collateral on their investment loans.
Prime brokerage executives told the Financial Times that several banks have issued the largest margin calls to their clients since the Covid crash.
“We are proactively reaching out to clients to understand [risk] across their overall books,” said one bank executive who spoke on condition of anonymity.
Another executive said the “breadth of moves across the board” caught hedge funds by surprise, with interest rates, stocks, and oil prices all down significantly.
As hedge funds faced Lehman-style margin calls, mom-and-pop investors purchased a record $4.7 billion worth of stocks on April 3.
For individual investors, this was the largest dip-buy in more than a decade, according to JPMorgan.
The bank said retail investors have learned their lesson from the Covid crash and are embracing a buy-the-dip mentality when there’s blood on the streets.
While history has proven this to be an effective long-term strategy, it could involve short-term pain as markets fully absorb the new economic reality of across-the-board tariffs.
When the dip keeps dipping
Experts like Fundstrat’s Tom Lee believe stocks are significantly oversold and due for an imminent reversal, but whether that happens this week could depend on how badly hedge funds are underwater on their trades.
If the margin calls continue, it could create a vicious cycle that leads to more selling, driving asset prices further down.
Following Trump’s “Liberation Day” tariff announcement, hedge funds’ long-short equity bets experienced their worst drop since 2016, according to Morgan Stanley. As a result, the net leverage on U.S. long-short positions plunged to an 18-month low.
The damage isn’t just concentrated in the U.S., either. Morgan Stanley analysts said Asia-focused hedge funds have been in the red over the past month as they scrambled to cut positions ahead of Trump’s tariff announcement.
Like their U.S. counterparts, Asian hedge funds reduced their leverage sharply over the past week.
Tech stocks appear to be the biggest casualty of this market recalibration. According to a recent report by Goldman Sachs, the semiconductor industry has experienced the heaviest selling pressure from hedge funds.
As a result, U.S. hedge fund exposure to tech stocks has fallen to the lowest level in five years, Goldman said.
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