Few Places to Hide

March was defined by the US and Israel’s attacks on Iran. Much has already been written about the market impact of the war, but in summary: inflation expectations flipped higher, as shown by higher breakeven inflation rates; expectations of central bank hawkishness increased; and prices for for oil, gas, and agricultural commodity futures surged. Equities and bonds sold off, as is their wont during inflation scares, while the US dollar strengthened against other currencies, again a reflection of inflationary and/or stagflationary fears for the global economy.

Navigating these markets proved particularly difficult for active managers. Firstly, a lot of multi-asset capital was positioned poorly for an inflationary shock, since much of the narrative in the early part of the year was focused on weaknesses in private credit, and the expectation that central banks would continue cutting rates as inflation fears subsided. Macro hedge fund managers were broadly long the short-end of government bond yield curves globally and short the US dollar, exactly the wrong positioning for the first week of the month.

The path through March was also difficult to trade. US President Donald Trump's general approach to markets (as we saw with Liberation Day) is to deploy extremely market-unfriendly rhetoric one day, only to reverse course with market-friendly vibes the next. This whipsawing narrative leaves traders in a muddle. The right approach was to be contrarian, predicting the next volte-face from the leader of the free world, but this is a dangerous tactic if the situation moves out of Trump's control. The next best option would have been to reduce risk materially at the start of the conflict, but the best macro traders have historically made the best returns when markets are volatile. It looks like the fear of missing out on this episode was too strong for many.

By the end of March, the hedge fund industry had seen small losses in most areas. This included not just where one might expect in strategies with tangible long exposure to risk assets such as equities or credit, but also in relative value strategies, arbitrages, and among macro traders (both human and computer-driven). It served as another reminder that sometimes in chaotic markets alpha can be negative at the same time as beta, which feels like statistical heresy.

Predicting how this develops in the short term is difficult for many of the reasons listed above (and whatever I expect at the time of writing will likely be out-of-date by the time it's read). However, over the longer term, it seems reasonable to assume that we are now firmly in an era of uncertainty and instability in geopolitics, which may feed through into market volatility with relatively little warning. The Middle East is arguably less secure than it was before the US strikes on Iran, and other countries are likely to be emboldened to further their own territorial ambitions given the impunity with which the US has acted this year.

Added to this are the challenges of navigating the development of the AI ecosystem, both in terms of the profitability (or not) of the companies delivering AI services and solutions, and of those being disrupted by them. Before the Iran war grabbed both the headlines and the market narrative, investors' primary concerns were the so-called 'SaaS-pocalypse' and its impact on private credit.

When, hopefully soon, the situation in the Middle East starts to de-escalate, commentators' attention is likely to turn back to these concerns. The forthcoming planned IPOs of both OpenAI and SpaceX should continue to test what investors are willing to pay for shares in the new tech economy.

Key drivers of hedge funds’ performance: an early March snapshot

Equity Long/Short:

• Given the market backdrop, it was a mixed month for Equity Long/Short strategies. Those managers with positive net exposure suffered losses, as did several market neutral strategies which were whipsawed by the volatility in the factor landscape
• However, a good number of managers who were able to maintain exposure throughout the month finished in positive territory from a P&L perspective. Managers used the market turmoil to add to high conviction trades that were largely unaffected by geopolitical events
• Managers also used the higher levels of volatility to trade their books more frequently, capturing profits and recycling exposure. Managers with a more quantitative approach generally saw slightly better returns, as some of the dislocations seen in quant equity in January and February normalised in March, given the more dominant geopolitical backdrop

Credit:

• The broader sell-off in risk assets also affected credit spreads, but to a lesser extent than one may have first feared. High Yield spreads widened by around 100 basis points (bps) during the first three weeks of March but then tightened a little into month end. Investment Grade spreads were only marginally wider on the month
• As a result, most Credit hedge funds held up fairly well during the month. Those with outright exposure saw losses in line with the broader decline in asset values, but Credit Long/Short and Capital Structure Arbitrage strategies were largely unaffected by market turmoil
• Furthermore, long-volatility strategies such as Convertible Bond Arbitrage saw small gains, with little sign of contagion or panicked selling

Event Driven:

• Market volatility led to some broad-based spread widening, particularly in larger US M&A deals. However, soft-catalyst event situations performed fairly well, with a number of hedge funds with broad Event strategies posting positive returns for the month
• Notable deals announced in March include Abbott acquiring Exact Sciences for approximately US$21 billion, UniCredit’s EUR 35 billion bid for Commerzbank and Poste Italiane’s EUR 10.8 billion cash-and-share bid for Telecom Italia
• There was a continuing stream of private equity investments in Japanese companies, with increasing numbers of rumoured and pre-announced transactions
• Restructurings include Worldline (proceeded with a rights issue), New Fortress Energy (splitting into separate entities) and AMC (refinancing 2027 bonds)

Macro:

• It was a difficult month across the board for Macro strategies
• Discretionary Macro funds faced significant headwinds. Most of the losses came from longs in developed market (DM) rates, where managers had generally added in February as concerns around private credit and potential AI-driven disruption in the labour markets stoked expectations of more dovish monetary policy. There were also losses in short US dollar trades and long equity exposures – all had been profitable in recent months, though reversed strongly in March
• EM Macro strategies faced a similar dynamic as longs in EM fixed income and FX struggled as the US dollar rallied. However, at the time of writing, we see EM strategies posting more muted losses compared to their DM counterparts
• Systematic approaches were also negative. Early-month reversals in rates, equities and FX caught Trend and Quant Macro strategies offside. A choppy backdrop throughout the rest of March, as ceasefire expectations oscillated, created a difficult environment for shorter-term strategies
• Fixed Income Relative Value funds posted modest losses, based on the limited data we’ve seen so far. We might have expected larger losses given the sell-off and volatility in rates markets
• Commodity strategies look to have fared well amid the volatility. Clearly those on the right side of oil moves led the way, while longs in other sectors generally worked well. The majority of losses came from precious metal longs, particularly within systematic approaches

On the radar:

• The short-term focus is on the length and fallout of the situation in Iran. Continued supply disruptions in the Strait of Hormuz may have knock-on effects on both inflation and global growth, which is likely to lead to significant volatility across all asset classes
• The medium-term focus now shifts to the second half of 2026 and Trump's actions ahead of the US midterm elections, where opinion polls suggest the Republican grip on the House is under serious threat. The once impregnable Senate majority is also coming under question as the President's approval ratings continue to slide
• Longer-term questions focus on the impact of AI on the workplace, the rotation of market leadership from a corporate perspective and the implications for employment, regulation and government policy

All sources and data Bloomberg, unless otherwise stated.