Hedge funds entered 2026 on a strong footing after a robust 2025, but the first quarter quickly highlighted how dependent performance remains on market conditions and strategy selection.
The first two months of the year were notably positive. Industry-wide returns reached approximately +4.3% by the end of February, supported by broad gains across strategies. Around 75% of funds were profitable in February, with macro and equity-focused strategies benefiting from trends in commodities, energy, and sector dispersion. Macro strategies were particularly strong, posting gains of roughly +4.15% in January and +3.0% in February, marking one of their best starts in years.
However, March proved to be a turning point. Hedge funds experienced their worst monthly drawdown in over four years, driven by heightened geopolitical tensions and a sharp sell-off in global equities. This sudden shift erased a significant portion of earlier gains and exposed weaknesses in several strategies.
- Equity long/short strategies were hit hardest, with losses across all regions. In March alone, declines reached approximately -4.3% in the U.S., -6.3% in Europe, and -7.3% in Asia. A major driver was the technology sector, which fell ~11.8% over the quarter.
- Macro strategies delivered strong gains early in the quarter but struggled in March as interest rate expectations shifted unexpectedly and geopolitical risks intensified.
- Systematic / CTA strategies stood out as relative outperformers, generating positive returns (~+1.1% in March) by capturing trends across asset classes during the volatility.
- Multi-strategy platforms, typically seen as resilient, were not immune. Diversification helped limit losses, but returns were generally modest or slightly negative by quarter-end.
Overall, Q1 2026 can best be described as a "two-speed" environment: strong early gains followed by a sharp risk-off phase. While the industry did not experience a broad collapse, performance fell short of expectations set by 2025's double-digit returns.
Dispersion has returned, and in a more volatile environment, outcomes are increasingly driven by strategy selection and risk management rather than market direction alone.