On Monday, May 12, 2025, global hedge funds recorded only modest gains, even as the U.S. stock market experienced a strong rally. The S&P 500 index surged 3.23% that day, closing at its highest level since March 26. In contrast, hedge funds on average were up just 0.60%.
The reason for this underperformance is linked to changes in hedge fund investment strategies over recent years. Since the start of Donald Trump’s trade war with China two years ago, hedge funds have gradually reduced their exposure to U.S. stocks and shifted more investments to other regions. This move was prompted by increased market uncertainty and a desire to avoid the volatility caused by Trump’s unpredictable tariff announcements.
In the weeks leading up to May 12, hedge funds had become more cautious. Many increased their short positions—betting that stock prices would fall—as they anticipated continued market instability. In fact, just before the rally, hedge funds were holding their most negative positions in five years. When the market suddenly surged on May 12, hedge funds had to quickly close these short positions, which limited their ability to profit from the rally.
Additionally, hedge funds did not benefit much from the sharp rise in technology and artificial intelligence stocks that day, because they had decreased their investments in these sectors prior to the rally. For the year through May 12, 2025, global hedge funds are up 2.12% on average, while the S&P 500 is down 0.69%.
In summary, despite a major market rally on May 12, 2025, driven by renewed optimism over U.S.-China trade relations, hedge funds saw only small gains. Their performance was held back by reduced investments in U.S. stocks, cautious positioning, and lower exposure to the sectors that led the market higher.