Long/Short Equity Strategies Face Challenges Amid Global Disruption

April 2025 has tested even the most seasoned long/short equity managers, as rapid escalation in geopolitical tensions and an unexpected wave of U.S. tariffs sent shockwaves through global markets. These developments have challenged the resilience of these strategies and raised broader questions about adaptability in an unpredictable macroeconomic environment.

A Month of Market Turmoil

The month began with a seismic shift in global trade policy by the U.S. On April 2, President Donald Trump announced extensive tariffs on a broad range of imports, referred to as “Liberation Day,” with the stated aim of bolstering domestic manufacturing and reducing trade deficits. This triggered a sharp sell-off in global equity markets. Over the next two trading days, from April 3rd to April 4th, the S&P 500 and Nasdaq Composite posted their steepest two-day declines since the COVID-19 pandemic, falling 10% and 11%, respectively. The Dow Jones index shed over 4,000 points, and the markets experienced a cumulative loss exceeding $6.6 trillion in value, the largest two-day drawdown in history. This abrupt repricing and wild market movements caught many investors off guard, leading to a rapid reassessment of risk and exposure. It triggered a significant rotation out of crowded mega-cap tech and momentum trades. The speed and size of this market reversal exposed hidden risks and raised concerns about the whole financial system, especially for funds using borrowed money or with similar investment positions.

Long/share equity hedge funds, structured to profit from both rising and falling equity prices, found themselves particularly exposed. The sudden market downturn led to significant losses, with many funds erasing year-to-date gains. According to Goldman Sachs, these funds fell 1.7% on April 3, bringing their year-to-date performance to -1.6%. The volatility also triggered margin calls, forcing funds to liquidate positions and further exacerbating market declines. The losses reflect the sharp market drawdown as investors reacted to the new tariffs that stoked fears of a global economic slowdown.

Defensive Positioning Falls Short

While many managers had adopted a more cautious posture in Q1, the magnitude of the drawdown suggested that even defensive positioning was insufficient. Goldman Sachs reported that hedge funds added more bearish positions than bullish ones in March than at any time since 2020, doubling down on bets that U.S. stocks have further to fall. This shift in sentiment was driven by escalating concerns over the economic impact of new tariffs and a deteriorating macroeconomic outlook.

Despite a cautious approach, leverage across long/short strategies remained elevated, near peak levels seen in the past half decade, leaving funds particularly vulnerable to sharp equity moves. The combination of high leverage and sudden market declines forced many funds to unwind positions rapidly, exacerbating losses.

The drawdown also highlighted a growing challenge for fundamental managers: how to hedge effectively in an environment where traditional macro relationships (rates, inflation, earnings revisions) are repeatedly overpowered by political shocks. The combination of elevated exposure and unstable cross-asset correlations created conditions where hedges broke down just as protection was needed most.

The sharp reversal marks the second major drawdown in recent weeks for long/short equity managers. On March 10, rising macro uncertainty and recession fears had already triggered a 1.5% intraday drawdown for many long/short managers as volatility surged and concentrated bets came under pressure. For allocators, the two episodes underscore how quickly fragile positioning can compound into systemic underperformance, even when directional calls are broadly correct.

Missing the Relief Rally

In a surprising turn, President Trump announced a 90-day pause on the new tariffs on April 9, leading to a significant market rally. The S&P 500 surged by 9.5%, marking one of its largest gains in recent history. However, many long/short equity hedge funds were unable to capitalize on this rebound. Having reduced their long exposures and increased short positions in anticipation of further declines, these funds were caught off guard by the sudden policy reversal. As a result, they underperformed the broader market during the rally.​

Global equities long/short hedge funds gained only 0.98% on the day, while U.S.-based hedge funds rose 2.28%, significantly underperforming the S&P 500. The unexpected rally caught many hedge funds with increased short positions, and some of the activity during the rally was attributed to covering short positions.

Strategic Reassessments and Adaptations

The events of April thus far forced hedge funds to reevaluate their strategies, with many reducing leverage, reassessing risk, recalibrating exposures, and in some cases, completely pivoting their positions. According to Morgan Stanley, net leverage among U.S. long/short funds has dropped to 37%, nearing historical lows, and a significant contrast to the risk appetite seen just a few months ago, reflecting the uncertainty and unpredictability of current market conditions.​ Those paying close attention to the balance sheet mechanics may see this as a defensive retrenchment. The bigger question is whether this shift represents a temporary volatility response or a broader structural rethink of how equity managers define and pursue alpha in a regime where policy signals whipsaw fundamentals.

In parallel, some funds are tactically rotating into hard assets and inflation-linked instruments to navigate the volatility. Greenlight Capital, as an example, shifted its focus to gold and inflation swaps, anticipating rising inflation due to government policies, a move that paid off and helped them post an 8.2% gain in Q1, outperforming the broader market.​ It’s a reminder that alpha in this market may not stem from equity selection alone, but from creative positioning across instruments and themes, where edge comes from dislocation rather than direction.

The Bottom Line

The challenges faced by long/short equity hedge funds in April underscore the importance of adaptability and strategic flexibility. As global markets continue to grapple with policy shifts, geopolitical tensions, and economic uncertainties, these funds must remain vigilant and responsive to rapidly changing conditions. Investors and fund managers alike are reminded of the importance of diversification, risk management, and the need to anticipate and adapt to unforeseen events in today’s complex and challenging global financial landscape.

For some funds, this has exposed structural weaknesses. For others, it has been a proving ground highlighting the value of differentiated thinking, tactical flexibility, and the ability to execute cleanly under pressure.

Whether the rest of the month brings more turbulence or stabilizes into a new baseline, it’s clear this is not just a temporary dislocation but a live test of investment edge. For allocators seeking durable alpha in the years ahead, how a manager responded in April may say more than a decade of back-tested returns ever could.

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