The Blubber

Hedge funds are currently grappling with substantial margin calls reminiscent of the 2008 financial crisis, as a market downturn triggered by President Donald Trump's recent tariff announcements has heightened fears of an impending financial collapse. The sharp decline in market values has compelled hedge funds to liquidate assets, with major Wall Street banks demanding additional collateral due to the rapid devaluation of holdings. This situation has raised concerns about a potential repeat of 'Black Monday' from October 19, 1987, when the Dow Jones Industrial Average plummeted by 22.6%, marking the largest single-day percentage drop in history.

The turmoil follows the implementation of a 10% global 'baseline' tariff, which took effect recently, impacting all U.S. imports except those from Mexico and Canada. Additionally, approximately 60 trading partners, including the European Union, Japan, and China, are set to face even higher, country-specific tariff rates starting April 9.

In response to the tariff-induced market instability, several major banks have issued the most significant margin calls to their clients since the onset of the COVID-19 pandemic in early 2020. The breadth of these calls, spanning multiple sectors such as technology and consumer goods, has sparked concerns that the aggressive sell-off may persist into the coming week. Margin calls can create a vicious cycle, as selling stocks to meet these demands can further depress prices. On Friday, gold prices fell more than 3%, erasing gains from earlier in the week, as investors sold bullion to cover their losses.

A prime brokerage executive noted, "Rates, equities, and oil were all down significantly… it was the broad market movements that caused the scale of the margin calls." Another executive emphasized proactive risk assessment, stating, "We are proactively reaching out to clients to assess [risk] across their entire portfolios."

Prime brokerage teams on Wall Street, which provide financing to hedge funds, held emergency meetings on Friday to address the increasing volume of margin calls. According to a recent report from Morgan Stanley's prime brokerage division, Thursday marked the worst performance for U.S.-based long/short equity funds since tracking began in 2016, with the average fund experiencing a 2.6% loss.

The magnitude of the equity sell-off on Thursday was among the largest on record. The report also indicated that current equity positions resemble those seen during the U.S. regional bank crisis in 2023 and the market sell-off triggered by the COVID-19 pandemic in 2020.

As a result of the intense selling pressure, the net leverage of U.S. long/short equity funds—reflecting the extent to which hedge funds borrow to amplify their investments—fell to an 18-month low of approximately 42%, as reported by Morgan Stanley.

Experts suggest that the damage could have been more severe if hedge funds hadn't already begun reducing stock positions and cutting leverage in anticipation of the ongoing trade war threats from the Trump administration.

In a further sign of tension within the hedge fund industry, gold, typically regarded as a safe-haven asset, experienced a decline of 2.9% on Friday, despite the widespread market negativity.

The 'baseline' tariff introduced by President Trump, which took effect just after midnight, utilized emergency economic powers to address perceived issues related to the nation's trade deficits. According to the White House, these trade imbalances were attributed to a lack of reciprocity in international relationships and other factors such as "exorbitant value-added taxes." On April 9, approximately 60 trading partners, including the European Union, Japan, and China, are expected to encounter even higher tariffs specifically adjusted for each economy.