Wall Street banks are demanding additional collateral from hedge fund clients due to a sharp decline in asset values, marking the most severe margin call pressure since early 2020. Escalating trade tensions have triggered a global market slump, comparable to the initial COVID-19 crisis. The S&P 500 has suffered its worst week since 2020, while oil and high-risk bonds have also seen significant sell-offs.
The market turmoil began with tariff announcements from the Trump administration, leading to retaliatory measures and heightened financial market anxiety. This has resulted in a broad sell-off across major asset classes, including equities, oil, and even safe-haven assets like gold, which fell sharply. Analysts suggest that investors are selling gold to meet urgent margin requirements, underscoring the market's intense pressure.
Hedge funds, typically operating with high leverage, are under significant strain. According to Morgan Stanley, long/short equity funds recorded their worst single-day performance since 2016, with average declines of 2.6%. The sell-off has been particularly intense in megacap tech, AI-related software and semiconductors, luxury goods, and investment banking stocks. Consequently, hedge funds have rapidly deleveraged, with net leverage dropping to an 18-month low of about 42%.
