Global hedge funds tracked by Morgan Stanley posted sharp losses last week as financial markets reeled from escalating US-China trade tensions, prompting managers to rapidly cut risk and push net leverage to near historic lows, according top a report by Reuters.

According to the bank’s latest client note, the year-to-date performance of the hedge funds it tracks turned negative, with a 3% decline following US President Donald Trump’s announcement of sweeping new tariffs on Chinese imports. China’s swift retaliatory measures only amplified investor fears of a full-blown global recession, catalysing the worst two-day equity selloff since the pandemic crash in 2020.

The S&P 500 and FTSE 100 dropped more than 10% and 6% respectively in the aftermath, while commodities also nosedived, with oil prices hitting their lowest levels in four years. Hedge funds, already bracing for a downturn, moved swiftly to unwind positions, particularly in export-heavy Asian markets that bore the brunt of the trade shock.

Morgan Stanley reported that net leverage among US long-short equity hedge funds fell to 37% by the end of the week—down from more than 50% earlier in the year and approaching pandemic-era lows. JPMorgan echoed the trend, citing net leverage at levels not seen since late 2023.

Net leverage, a key barometer of hedge fund risk exposure, measures the difference between a fund’s long and short positions relative to its overall portfolio value. A lower figure suggests hedge funds are taking a more defensive stance, potentially signalling expectations of further market turbulence ahead.

“This global selloff has so far been too orderly, so probably more to go,” said Eddie Tam, CIO at Hong Kong-based hedge fund Central Asset Investments, noting that in the current environment, maintaining a risk-off posture is prudent given the uncertainty around trade policy.