Under the tariff earthquake, global hedge funds have lost their sense of direction, with shorting U.S. stocks becoming the only consensus

According to Zhitong Finance APP, as tariff policies trigger severe market fluctuations, most hedge fund managers choose to remain inactive and are still unwilling to make any significant bets, with one notable exception: they are heavily shorting U.S. stocks.

Data provided by former Bridgewater executive Bob Elliott shows that the so-called market confidence—a measure of hedge funds' confidence in implementing specific investment strategies—has begun to recover after falling to its lowest level in decades. However, the positions in major asset classes (including currencies, bonds, and commodities) remain weak after dropping to the lowest 10% range since 2000 at the end of March.

Elliott pointed out that the only significant change in April is that, despite a recent market rebound, hedge funds have increased their short positions on U.S. stocks. His company, Unlimited, tracks real-time data from 3,000 hedge funds managing approximately $5 trillion in assets.

In an interview, Elliott stated, "We are now seeing that fund managers are more focused on policy rather than rhetoric, and the current series of policies is clearly negative. The potential for economic weakness may be a more important issue than transient remarks from Besant or Trump."

The overall conservative stance reflects the extreme uncertainty in the policy environment. This month, U.S. President Trump introduced comprehensive tariff measures that intensified trade tensions, only to later postpone these plans during negotiation discussions, further increasing the uncertainty in the policy environment. This has prompted Wall Street professionals to significantly reduce their positions. Now, although retail stock traders are adopting a buy-the-dip strategy, the so-called smart money is increasingly preparing for further declines—at least in the U.S. market. On Tuesday, the S&P 500 index rose for the sixth consecutive trading day, marking the longest streak of gains since last November.

Elliott stated, "For hedge funds, operating in this environment is a challenge. One way they are responding to policy fluctuations is by holding cash from a risk perspective, so they can quickly adjust when there is a clear direction."

Unlimited uses machine learning to analyze the overall positions and returns of mainstream hedge fund strategies, constructing portfolios that replicate hedge fund investments, including two actively managed ETFs focused on global macro and multi-strategy returns.

Shorting Trend

Elliott noted a clear trend in Unlimited's research: stock long-short strategy fund managers are reducing their holdings in U.S. stocks while increasing their bets on European and Japanese stocks.

This is different from the situation before and shortly after last year's election, when funds were clearly optimistic about U.S. stocks, especially betting on a growth-friendly environment. However, after Trump's policy focus became clear from February to March this year, fund managers quickly reduced their long positions and shifted to short positions. By April, as market volatility increased, they adopted a more pessimistic stance. In fact, data shows that the current underweighting of U.S. stocks is second only to a few periods since 2000, such as during the financial crisis

Elliott stated that although hedge funds remain extremely bearish on small and mid-cap companies, many funds see highly attractive long opportunities in the financial and banking sectors due to improving fundamentals and relatively low valuations attracting interest in the area.

Emerging market investments are also prominent. Data shows that in the first quarter, emerging market investments were the best-performing fund type, with returns reaching 6.3% due to the rise in the Chinese stock market, while the overall return of the hedge fund industry during the same period was only 1.7%.

In Elliott's view, the U.S. faces three severe challenges: federal policies, including tariffs, may hinder economic growth; foreign investors' interest in U.S. assets is declining; and policy uncertainty is increasing. He noted that these factors are not fully reflected in current market prices.

Elliott stated, "Based on current stock earnings growth expectations and valuations, the anticipated slowdown in economic growth has not been priced in. Although the dollar has recently declined, it remains high, and U.S. stocks have seen decades of gains relative to stocks in other developed economies, currently only experiencing a slight pullback. Unless there is a significant shift in the current government's policies, these trends may continue."