Hedge funds exit Asian markets ahead of US tariff announcement on April 2

Hedge funds pulled back from Asian markets last week, shedding stocks and reducing leveraged positions as they prepared for US President Donald Trump’s announcement of new reciprocal tariffs on April 2.

South Korea, China’s onshore markets, and Taiwan saw the heaviest selling, while hedge funds also ramped up short bets in Japan, Morgan Stanley noted in a prime brokerage report this week.

The shift in positioning reflects growing uncertainty over Trump’s latest trade measures, which could sharply increase tariff rates and disrupt global commerce.

Export-driven Asian economies remain particularly exposed to US tariff risks.

According to a recent US Treasury report, China, Vietnam, Japan, and Taiwan hold the largest trade surpluses with the US, making them vulnerable to any retaliatory action.

The anticipated tariffs could further escalate tensions between Washington and its key trading partners, with analysts warning of potential spillover effects on global supply chains.

Asian stock markets' reaction to tariff concerns

Asian stock markets have already felt the pressure of tariff concerns.

Since March 26, when Trump announced a 25% tariff on imported cars, Japan’s Nikkei 225 index has declined by 6%, while South Korea’s KOSPI has dropped by 5%.

China’s CSI 300 index and Hong Kong’s Hang Seng index hit nearly one-month lows on Monday as investors braced for further trade uncertainty.

Morgan Stanley analysts noted that Asian hedge funds suffered losses of around 60 to 70 basis points last week, bringing their average monthly return down by 0.37%.

In response, these funds significantly reduced their net leverage, which fell by six percentage points to 61% compared to the previous week.

By region, hedge funds flipped to net sellers in South Korea, anticipating volatility from the country’s decision to lift a five-year short-selling ban.

They also unwound consumer stock positions in China and exited sizable holdings in Taiwan. The outflows were mainly driven by multi-strategy and macro funds, according to Morgan Stanley.

Broader hedge fund positioning

The retreat from Asian markets is part of a broader trend of hedge funds cutting exposure globally.

A separate report from Goldman Sachs said that hedge funds have significantly reduced their holdings in major emerging markets, maintaining a higher number of short positions than long ones in Latin American and Asian equities so far this year.

In Asia, March saw particularly heavy selling of stocks, according to Goldman Sachs data. Short positions, which bet on declining asset prices, outnumbered long bets, which anticipate gains.

Funds have also scaled back investments in stocks closely tied to economic cycles.

Companies such as auto-parts manufacturers, select jewellery brands, and home furnishing retailers—sectors that typically struggle during periods of weak consumer spending—have seen notable declines in hedge fund interest.

European auto stocks, once a favoured trade for hedge funds earlier this year, are now being offloaded.

Selling pressure has intensified since Trump announced a 25% tariff on imported cars and light trucks set to take effect on April 3, with additional duties on auto parts scheduled for May 3.

Speculators have increased short bets on the sector, driving the ratio of long to short positions to near historic lows, Goldman Sachs noted.

Meanwhile, hedge funds have been net buyers of stocks linked to metals prices in recent weeks, accumulating positions at multi-year highs, according to the bank’s analysis.