Hedge Funds Suffer Amid Iran Conflict Oil Price Surge

• Hedge funds experience major drawdowns due to the conflict with Iran and subsequent oil price spikes.
• Traditional diversification strategies within hedge funds offer limited protection during the market selloff.
• Equities appear more vulnerable than bonds as investors unwind risk positions.
• The disruption to shipping routes impacts the flow of money back into financial markets, exacerbating the situation.

Worst Drawdowns Since Liberation Day

This is the way... things are going, apparently. Word is, hedge funds are getting tossed around like a Jawa in a sandstorm thanks to the mess with Iran. Seems like a spike in oil prices and a general market freak-out are undoing all their fancy trades. These money folks are seeing their worst losses since what they’re calling "Liberation Day," which sounds like something the Empire would name a particularly nasty planet-cracking event. Rapid shifts in equities, currencies and commodities have forced investors to unwind positions across global markets and the selloff marks a rare moment when traditional diversification within the hedge fund universe has offered little protection. This is not the way they thought it would go.

Unwinding Risky Bets

Before all the blaster fire started, many hedge funds were betting big on global growth, including overweight positions in equities and emerging markets, alongside bets against the U.S. dollar. Now, these trades are unraveling faster than a droid’s wiring after a close encounter with a thermal detonator. Markets have generally been risk-off, with many trading on inflation fears or even the potential for a negative growth shock from increased oil prices. The MSCI World Index saw a decline of over 3% since the start of the war on Feb. 28 after striking a record high in early February. The U.S. dollar index strengthened around 2% across the same period of time. Remember when I said "I can bring you in warm, or I can bring you in cold" - well the markets are bringing the funds in ice cold. Speaking of messy situations, the Panama Canal situation is becoming quite a problem. I recently read Panama Seizes Ports From Hong Kong Firm Triggering Geopolitical Tensions and it only reminds me that the canal is a crucial artery for global trade, and disruptions there can ripple through the entire financial system.

Strategies Getting Hammered

It seems some strategies, the ones tied closely to stocks, are taking the brunt of the hit. These long/short equity funds, which bet on stocks going both up and down, are among the worst performers this month. They're down about 3.4% so far, compared to a 2.2% drop for the whole industry, according to the data trackers. Even weirder, strategies that usually benefit from chaos are struggling. This is like finding out a Jedi can’t use the Force – something’s definitely not right. "The large multi-strategy platforms should hold up well given minor sell offs in the industry because they tend to have little market exposure," said Steinbrugge.

Oil Shock Breakdown

This breakdown in old patterns is because the current situation is a bit of a mudhorn. Oil prices have shot up due to problems with tanker traffic through the Strait of Hormuz, but the bigger market impact is getting muddled by worries about inflation and a hit to global growth. Normally, when oil prices rise, oil-exporting nations get more money, and some of that gets reinvested into global markets. It may have helped soften the blow for investors. This time, disruptions to shipping routes are interrupting those flows and that reduces the amount of money flowing back into financial markets, removing a key source of cash flows.

Everyone's an Oil Trader Now

According to HFR President Ken Heinz "The overall situation is too fluid to determine whether we're in a short-term period of volatility or the start of something longer-term. If I were to sum up the sentiment across the hedge fund world it's 'right now, we're all oil traders.'" The turbulence is not affecting all funds equally. Large multi-strategy platforms, which spread risk across multiple trading styles, have so far held up better than more directional funds. "The large multi-strategy platforms should hold up well given minor sell offs in the industry because they tend to have little market exposure," said Steinbrugge.

What's Next for the Funds

So, what’s next? These hedge funds had their best year in 16 years back in 2025, with equity strategies and thematic macroeconomic funds leading the way. Now, their fate depends on how long this conflict and the oil disruption last. If things calm down and shipping routes go back to normal, the markets might stabilize, and these losses could be temporary. But if this drags on, higher energy prices could start to hurt the global economy, slowing growth and keeping markets under pressure. If geopolitical risks continue, it is likely that redemptions could pick up as some investors seek safety. Remember, I always say “This is the way” whether things are good or bad, but in this case, “This is the way” might mean “time to find a new asset allocation.”