Hedge funds moved swiftly to offload stocks and reduce leveraged positions across Asian markets last week, positioning defensively ahead of US President Donald Trump’s reciprocal tariff announcement on 2 April, according to a report by Reuters citing data from Morgan Stanley.
Markets in South Korea, mainland China, and Taiwan bore the brunt of the sell-off, while hedge funds increased short positions in Japan, Morgan Stanley noted in a recent prime brokerage report.
Export-reliant Asian economies face heightened vulnerability to tariff threats, particularly China, Vietnam, Japan, and Taiwan, all of which hold substantial trade surpluses with the US, as highlighted in a recent US Treasury report.
Investor sentiment turned bearish after Trump’s 26 March declaration of a 25% tariff on imported cars, triggering a 6% decline in Japan’s Nikkei 225 index (.N225) and a 5% drop in South Korea’s KOSPI index (.KS11). Meanwhile, China’s CSI 300 Index (.CSI) and Hong Kong’s Hang Seng Index (.HSI) slid to nearly one-month lows on Monday, reflecting escalating concerns over potential trade disruptions.
Morgan Stanley analysts described the past week as challenging for Asia-focused hedge funds, estimating industry-wide losses of approximately 60 to 70 basis points. This decline pushed monthly returns for these funds to an average loss of 0.37%.
The sharp sell-off suggests hedge funds moved aggressively to mitigate risk ahead of Trump’s new tariff measures. Net leverage across Asia fell notably, declining six percentage points to 61% week-over-week, according to Morgan Stanley’s report.
Regionally, hedge funds transitioned to net selling in South Korea in anticipation of the country lifting a five-year short-selling ban. In China, they unwound consumer stock positions, while in Taiwan, they exited sizeable holdings. The report indicated that the outflows were primarily led by multi-strategy and macro funds.
While hedge funds have been retreating from equities on a global scale, a separate note from Goldman Sachs highlighted that selling pressure on Asian stocks in March was particularly intense, marking the largest net outflows by hedge funds since October 2024.
