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Hedge funds have been hit with the biggest margin calls since Covid shut down huge parts of the global economy in 2020, after Donald Trump’s tariffs triggered a powerful rout in global financial markets.
Wall Street banks have asked their hedge fund clients to stump up more money as security for their loans because the value of their holdings had tumbled, according to three people familiar with the matter. Several big banks have issued the largest margin calls to their clients since the beginning of the pandemic in early 2020.
The margin calls underscore the intense turbulence in global markets on Thursday and Friday as Trump’s tariffs announcement was followed by retaliatory duties by China, and other countries readied their own responses. Wall Street’s S&P 500 share index was set to post its worst week since 2020, while oil and riskier corporate bonds have sold off heavily.
“Rates, equities and oil were down significantly . . . it was the breadth of moves across the board [which caused the scale of the margin calls],” said one prime brokerage executive, adding that it was reminiscent of the sharp and broad market moves in the early months of the Covid pandemic.
“We are proactively reaching out for clients to understand [risk] across their overall books,” said a prime brokerage executive at a second large US bank.
According to two people familiar with the matter, Wall Street prime brokerage teams — which lend money to hedge funds — came into the office early on Friday and held all hands on deck meetings to prepare for the large amount of margin calls to clients.
Thursday was the worst day of performance for US-based long/short equity funds since it began tracking the data in 2016, with the average fund down 2.6 per cent, according to a new weekly report by Morgan Stanley’s prime brokerage division.
The report said that the magnitude of hedge fund selling across equities on Thursday was in line with the largest seen on record, as they dumped equity positions at a level in line with the US regional bank crisis in 2023 and the Covid sell-off in 2020.
Selling was concentrated in sectors including megacap technology, groups exposed to artificial intelligence across software and semiconductors, high-end consumer, and investment banks.
The selling drove US long/short equity fund net leverage, a measure of borrowing used to magnify bets, down to an 18-month low of about 42 per cent, the Morgan Stanley report said.
The pain so far would have been greater had many hedge funds not been scaling back their stock positions and cutting their leverage with banks in recent weeks in response to the trade war Trump had been threatening.
In a further sign of the tumult across the hedge fund sector, gold — a traditional safe haven for investors — dropped 2.9 per cent on Friday, despite the deep gloom among global investors.
Suki Cooper, a precious metals analyst at Standard Chartered, suggesting the precious metal was being used to “meet margin calls.”
Additional reporting by Kate Duguid in New York