Hedge Funds Brace for Trump's 'Liberation Day' Tariffs

As the clock ticks down to April 2, 2025, the financial world is on edge. President Trump's "Liberation Day" tariffs are set to reshape U.S. trade policy, and hedge funds are scrambling to position themselves in a rapidly shifting landscape. The tariffs, which include a 25% levy on foreign-made vehicles and increased duties on steel, aluminum, and semiconductors, are designed to protect domestic industries but could have far-reaching consequences for the global economy.



Hedge funds have been quick to adapt their strategies in response to the anticipated tariffs. One of the most notable changes has been a significant increase in borrowing, reaching levels not seen since 2010. This move suggests a heightened level of activity and preparation for potential market volatility. Additionally, hedge funds have been betting on the rising value of the dollar, which could serve as a hedge against the potential inflationary effects of the tariffs.

However, the story doesn't end there. Initially, hedge funds were net buyers of equities in sectors expected to benefit from Trump's policies, such as financial, industrial, and defense. But soon after, they became net sellers of U.S. equities. This shift can be attributed to the uncertainty surrounding the impact of anticipated deregulation measures and concerns about consumer spending power in sectors like hospitality and healthcare. For instance, "Following inflows into stocks thought to be positively affected by the arrival of the president in the financial, industrial, and defense sectors, data showed a trend reversal soon after. Instead, hedge funds became net sellers of US equities." This indicates a cautious approach as hedge funds prepare for a shifting financial landscape.

The uncertainty over the impact of trade tariffs on the U.S. economy has also been a significant factor. Morgan Stanley pointed to a 2019 study by the International Monetary Fund that suggested a 5% increase in tariffs during economic expansion could decrease productivity by around 1% over five years. This highlights the potential long-term economic implications of the tariffs, which hedge funds are likely considering in their strategies.



In summary, hedge funds are targeting sectors for investment or divestment based on the anticipated economic impacts of the new tariffs. They are divesting from equities linked to the President due to uncertainty, investing in the dollar and gold as hedges against inflation and geopolitical risks, and focusing on capital preservation strategies in sectors likely to be impacted by the tariffs. As the tariffs take effect, the coming months will be crucial in determining whether "Liberation Day" strengthens the U.S. economy or exacerbates trade tensions with key partners.