A frenzy of hedge fund trading that has been a boon to investment banks may suddenly be nearing its limit, as big investors privately mull one of the dreaded phrases of Wall Street: the sidelines.
In Manhattan and beyond, some active traders are debating behind the scenes whether it’s time to throw in the towel on trying to predict President Donald Trump’s market jolts.
As one hedge fund manager, sleeping three hours a night, put it: There’s so much chaos and risk that any trade placed one day can blow up the next. The person asked not to be identified describing pressure on the firm.
A pullback by active money managers can have wider repercussions. For banks and other market-makers, it means volatility might tip from good to bad, saddling them with depreciating assets amid a dearth of buyers. Market swings would get wilder, too.
After Trump shocked markets with the steepest tariff hikes for US trading partners in a century, some senior hedge fund managers have concluded the next big trade will be when he rolls them back, according to people with knowledge of their thinking. But the money managers are worried that they won’t be able to see that coming either. So at the moment, it’s perhaps wiser to focus on tamping down risks.
“There’s been a clear pivot to risk management: lower gross and net exposures, more cash on the sidelines,” said Bruno Schneller, managing partner at Zurich-based Erlen Capital Management, which invests in hedge funds.
Trump’s move to redraw the global trade order sparked one of the worst days for equities since the peak of the coronavirus pandemic. On Thursday, the S&P 500 fell almost 5%, erasing $2.5 trillion. Havoc spread across markets with yields on the 10-year US Treasury dipping below 4% again and the greenback extending its slide.
One fund manager said he quickly began shorting the US dollar, taking advantage of the plunge.
Indeed, armies of money managers have had their confidence shaken after trying to interpret Trump’s public comments in recent weeks and then incurring losses by failing to position their books for the policies that ensued. Stalwarts including Millennium Management, Citadel and Balyasny Asset Management took hits in their funds in March as the tariffs gained steam.
One hedge fund executive said investment meetings at his firm — and many others — have split into two camps. Half predict the current turmoil will be short-lived and that Trump will soon succumb to pressure to dial back tariffs. The other half believe the president will stay the course this time.
At some firms, the confusion reaches up to the level of chief investment officers. Lower in the ranks, traders say they’re struggling to figure out how to maneuver their books in the most unusual market environment they’ve ever seen, with price moves hinging on a single, unpredictable person.
“It’s always tricky when markets are reacting not just to policy, but to personality,” Schneller said. Instead of analyzing fundamentals, traders have to anticipate Trump’s impulses.
“Do you bet that political and market pressure will force a walk-back, or that he’ll double down to project strength?” he said. “Most managers we speak to are trying to stay nimble and avoid making directional bets purely on headline risk.”
Initially at least, institutional investors raced to adjust their portfolios after Trump’s announcement. Goldman Sachs Group Inc. partner John Flood wrote in a note to customers that the level of activity on his desk was a “9.5 out of 10” — its busiest day since January, when the emergence of Chinese AI startup DeepSeek rattled global markets.
But behind the scenes at hedge funds, many trades aren’t bold new bets. There, teams are spending most of their time hedging strategies, deleveraging old positions and stockpiling cash, people with a view of the situation said. Avoiding losses in April and coming out “flat” is now considered the new profit, one industry executive said.
Such periods can be a nightmare for portfolio managers who, in the midst of it all, may start hearing from clients looking to max out how much they’re allowed to draw down.
Elsewhere, a hedge fund recruiter got word that a client wants to halt all hiring until further notice.
Deal Paralysis
Private equity executives also are searching for answers.
Law firm Akin Gump has been inundated with calls from buyout shops trying to understand how the tariffs will affect supply chains for their portfolio companies, according to a person with knowledge of the situation. Many clients hadn’t expected the tariffs to be so high or widespread.
Dealmakers at some private equity firms are now hesitant to bring transactions to their investment committees unless the companies are global businesses plying services or software, or have operations and supply chains based entirely in the US, a person familiar with the matter said.
Initial public offerings of portfolio companies are also getting shelved, another person said, describing the situation as paralysis.
Some US private equity stocks dropped the most ever on Thursday.
And, of course, like always on Wall Street, there are people scouring for opportunities — if not in the US, then other regions.
“We are unashamedly active,” said Meagen Burnett, chief financial officer at asset manager Schroders Plc.
Since the end of last year, the firm has experienced a pickup of client interest and money into its international investment funds, Burnett said in an interview. “What we’re seeing is an interest in diversification and an interest in what the UK and Europe could look like in this new world, post-tariff world.”
Written by: Hema Parmar, Gillian Tan, and Allison McNeely — With assistance from Sonali Basak, Katherine Burton, Silla Brush, Todd Gillespie, and Sam Nagarajan @Bloomberg
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