In the last week of January 2025, hedge funds executed significant sales of global equities and increased their short positions, according to a Goldman Sachs report. These actions preceded U.S. President Donald Trump’s announcement of imposing tariffs on Canada, Mexico, and China, leading to a downturn in international markets.
On Monday, February 3, global markets experienced a notable decline after President Trump announced tariffs of 25% on imports from Mexico and Canada, and 10% on Chinese products. This move signals the onset of a trade war that could hinder global economic growth.
According to a Goldman Sachs note published the previous Friday and cited by Reuters, hedge funds sold their equity holdings across all geographical regions, except in developed Asian markets. This significant sell-off is the largest since August 2024, when a market downturn, initiated by the unwinding of yen carry trades, impacted U.S. tech stocks.
Hedge funds bet against all sectors, with industrials, consumer discretionary, energy, and communication services being the most affected. The number of short positions in industrial stocks nearly doubled that of long positions, according to Goldman Sachs data.
The real estate sector was the exception, where hedge funds increased their investments for the fourth consecutive week, marking the fastest pace in two months. All categories of real estate stocks, including residential, commercial, and healthcare, were popular among these funds.
Bruno Schneller, managing director at Erlen Capital Management, commented: “Real estate often performs well in inflationary environments, as property values and rents tend to rise with inflation. If trade wars lead to higher import costs and broader inflationary pressures via tariffs, real estate becomes an even more attractive hedge against eroding purchasing power.”
The market reaction was immediate. Major indices, including the Dow Jones, S&P 500, and Nasdaq, recorded declines of up to 1.9%. Asian and European markets also suffered significant losses. Additionally, currencies such as the Canadian dollar, Mexican peso, and Chinese yuan depreciated against the U.S. dollar.
These protectionist measures by the Trump administration have raised concerns about a potential recession in Canada and Mexico, as well as an economic slowdown in the eurozone. Analysts warn of supply chain disruptions, increased costs, and possible inflation spikes. Despite the volatility, some suggest that a resolution through negotiations is still possible.
In summary, the combination of strategic moves by hedge funds and U.S. trade policies is shaping an uncertain global economic landscape, with significant implications for financial markets and the world economy.
Performance of Major Stock Indices Following Tariff Announcement
| Index | Change (%) |
|---|---|
| Dow Jones | -1.9 |
| S&P 500 | -1.8 |
| Nasdaq | -1.7 |
| Nikkei 225 | -2.0 |
| FTSE 100 | -1.4 |
Hedge Fund Movements by Sector
| Sector | Short Positions (%) | Long Positions (%) |
|---|---|---|
| Industrials | 65 | 35 |
| Consumer Discretionary | 60 | 40 |
| Energy | 55 | 45 |
| Communication Services | 50 | 50 |
| Real Estate | 30 | 70 |