Hedge funds have been hit with the steepest margin calls since the onset of the Covid-19 crisis, as last week’s tariff-fueled sell-off sparked a wave of forced deleveraging across the industry, according to a report by the Financial Times citing data from prime brokerage sources including Morgan Stanley.

The escalation in the US-China trade war — triggered by former President Donald Trump’s announcement of sweeping new tariffs — wiped over $5.4tn off US equity valuations in just two days, prompting several major Wall Street banks to demand additional collateral from hedge fund clients whose portfolios had sharply declined in value.

Multiple prime brokers issued margin calls at a scale not seen since early 2020, underscoring the breadth and severity of the market dislocation. The S&P 500 posted a 9.1% weekly drop — its worst since the start of the pandemic — while the widespread sell-off spanned equities, rates, and commodities, triggering broad-based risk-off positioning.

“The velocity of the moves across asset classes — not just equities, but also rates and oil — was what drove the size of the margin calls,” said one senior executive at a US prime brokerage. “It was reminiscent of the kind of cross-asset turmoil we saw in March 2020.”

According to Morgan Stanley’s latest prime brokerage report, Thursday marked the worst single-day performance for US long-short equity funds since the firm began tracking the data in 2016, with the average fund down 2.6%. The pace of hedge fund equity selling matched levels seen during the regional banking crisis in 2023 and the initial Covid shock. Although losses were significant, industry insiders note that the damage could have been worse. Many funds had proactively reduced gross and net exposures in recent weeks, cutting leverage amid growing concern over Trump’s increasingly hawkish trade rhetoric.

Still, the liquidity stress was apparent. Even traditional safe-haven assets were not spared, with gold tumbling 2.9% on Friday — a move some analysts attributed to hedge funds selling positions to raise cash for margin obligations.

“Gold appears to have been used as a liquidity source to meet margin calls,” noted Suki Cooper, precious metals strategist at Standard Chartered.