Hedge funds bet Trump trade war will spark global recession
Investors have rushed to offload shares in North American and European companies amid mounting market turmoil, as hedge funds brace for a potential global recession. Data from Goldman Sachs reveals that last month, top money managers aggressively sold off stocks that could be vulnerable to an economic downturn, while shifting their focus to more resilient sectors.
January saw a notable exodus from stocks reliant on discretionary consumer spending—such as hoteliers, restaurateurs, and luxury goods sellers—marking the fastest sell-off since March 2022, following Russia’s invasion of Ukraine. Instead, hedge funds redirected investments towards defensive stocks, including healthcare and utility companies, which historically generate stable returns regardless of economic conditions.
Bruno Schneller, of asset management firm Erlen Capital Management, stated: “The rotation into more resilient sectors suggests hedge funds are positioning for a potential economic downturn.”
The sell-off coincided with widespread anxiety over former US President Donald Trump’s proposed 25% tariffs on imports from Canada and Mexico. The anticipation of these tariffs has exacerbated concerns about the fragility of global trade and its knock-on effects on the world economy.
Trump’s victory in the november US elections initially sparked optimism in financial markets, leading hedge funds to pour capital into so-called “Trump trades”, including investments in banking, defence contractors, and heavy industry. However, sentiment shifted sharply in January as fears of a trade war took precedence over the earlier optimism.
According to Goldman Sachs, hedge funds reduced their holdings in North American and European businesses at their fastest rate since last summer, when the Bank of Japan’s unexpected interest rate hike—its first in 17 years—triggered global market upheaval. North American stocks were particularly affected, with hedge funds also betting against US-listed exchange-traded funds (ETFs), further reflecting their bearish outlook.
Adding to the volatility, the market witnessed a sharp sell-off in major US technology companies after the launch of a new AI-powered chatbot by Chinese start-up DeepSeek earlier in January. The debut of DeepSeek’s large language model heightened concerns that the valuations of major US tech giants had become excessively inflated since OpenAI’s release of ChatGPT in November 2022.
Hedge funds, which had profited significantly from the so-called “magnificent seven” stocks—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—appeared to be locking in gains and reassessing their portfolios. Harald Berlinicke, a partner at Sarnia Asset Management, remarked: “Hedge funds that have ridden the AI wave seem to be taking profits and moving into a more defensive stance.”
The sell-off was not confined to the US. European companies also bore the brunt of hedge fund withdrawals in January, with German, Danish, Irish, and Swiss firms suffering the steepest declines.
Mr Schneller noted that the Goldman Sachs data indicates hedge funds are “tactically adjusting their portfolios to navigate an evolving economic landscape.” He added that their moves suggest a more “cautious stance” in light of growing concerns about a looming economic slowdown.
As hedge funds pivot towards defensive investments, market watchers remain on edge, with fears that escalating trade tensions and monetary policy shifts could accelerate the downturn. Investors now face a precarious balancing act as they attempt to shield their portfolios from the risk of a global recession.
