The biggest sell-off in 13 years: Hedge funds are frantically fleeing the U.S. stock market

Overnight, global markets closed out amid divergence and turbulence.

After Brent crude briefly broke above $115 a barrel on Monday this week, it has continued to hold above the $110 level. U.S. WTI crude jumped again by nearly 12% on Thursday, posting the largest single-day gain in six years, to close at $111 a barrel—bringing the year-to-date increase to as high as 94%. International benchmark Brent crude also rose to $109 a barrel, with a year-to-date gain approaching 80%.

The spark behind the surge in oil prices is the uncertainty surrounding the situation in the Middle East.

In a nationwide address on Wednesday, the U.S. president said the war would “end very soon,” but also pledged “further extremely hard-hitting” blows against Iran over the “next two to three weeks.” The market did not wait for a clear ceasefire roadmap, nor did it get specific plans for reopening waterways. Trump only said the strait would “naturally open,” while emphasizing that military action would continue until “the objective is fully achieved.”

Deutsche Bank’s co-head of equities Jim Reid said the speech almost offered no new information about a timeline or conditions for ending hostilities against Iran: “There are no signs that the U.S. is trying to end this war as quickly as possible.” This uncertainty caused oil prices to rise instead of falling after the speech, fully reversing two consecutive days of declines.

The stock-market response, however, was more complex. Early Thursday trading, all three major indexes plunged sharply, but as Iran’s deputy foreign minister signaled that “after the war, a new navigation framework for the Strait of Hormuz would be proposed,” market pessimism eased somewhat, and indexes gradually recovered losses in the afternoon.

By the close, the S&P 500 was up slightly by 0.11%, the Nasdaq rose 0.18%, the Dow fell 61 points, and the Russell 2000 small-cap index rose 0.7%.

B. Riley Wealth Management’s Art Hogan pointed to a subtle divergence: “It seems the stock market is more convinced than the broader market that we are closer to getting out of trouble.” In his view, investors’ optimistic interpretation of Trump’s remarks may be a bit too quick.

However, this optimism is being eroded by time. Dave Grecsek, co-head of Aspiriant Wealth Management, observed that the market is growing increasingly skeptical about the authenticity of Trump’s statements. “At first, people attached more importance to what he said—whether it was tariffs or what happened in Venezuela or Iran,” he said. “But at some point, the market started questioning some of his statements.”

Still, a one-day rebound cannot mask the bleak tone of the entire Q1.

Hedge-fund exodus: the heaviest sell-off in 13 years

The data show that “smart money” is exiting at an astonishing speed.

A recent report from Goldman Sachs’ prime brokerage business shows that global hedge funds recorded net stock selling of $—in March—setting the second-highest record since the firm began tracking this data in 2011. By speed, this is the fastest withdrawal pace in 13 years.

What’s worth watching is that this isn’t simply profit-taking. The data show that short positions in U.S. large-cap ETF—jumped by 17% in just a month. That means hedge funds are not only selling holdings, they are also actively building short positions—betting that the market will fall further.

As Goldman Sachs puts it, the market has entered a dangerous “deleveraging cycle”—when highly leveraged players pull back collectively, liquidity can dry up quickly, and even small negative news can trigger sharp price swings.

Core logic: from the “rate-cut trade” to the “stagflation trade”

If the market’s main theme in 2025 was an optimistic narrative built around “Fed rate cuts,” then the logic for March 2026 has been completely rewritten.

The “second-round” expectations triggered by the war in the Middle East are the fundamental reason for this break.

After oil prices broke above $110, the transmission effect is accelerating. The U.S. average retail gasoline price has risen to $4.08 per gallon, up from $2.98 before the war. Data from the American Automobile Association (AAA) show that in some areas, gas station prices have surpassed $5, while in California they are even close to $6 per gallon—meaning each household will spend about $40 more per week on fuel.

(U.S. California gasoline prices)

The continued surge in energy prices is intensifying market worries that inflation may be back on the rise.

A Bank of America analyst projects that the Federal Reserve’s preferred inflation gauge—the PCE index—will “spike sharply” in this quarter, with the peak close to 4%. But January PCE was only 2.8%. Eurozone inflation in March jumped from 1.9% in February to 2.5%.

The “soft landing” script that markets previously widely believed—central banks can suppress inflation without hurting the economy—is being torn apart by reality.

Some analysts on Wall Street believe that if energy prices remain elevated, central banks around the world may not only be unable to start a rate-cut cycle, but could even be forced to hike rates again.

The stagflation shadow of “high interest rates + high inflation + economic stagnation” is the fundamental driver behind hedge funds’ large-scale exit.

Defensive sectors become a safe haven

By observing how capital shifts across different sectors, you can clearly see the fear path of professional investors.

Cyclical sectors suffered blanket de-risking and indiscriminate selling. Industrials and materials—these “barometers” of global economic growth—were collectively liquidated by hedge funds in March. Financials were also abandoned; in a high-rate environment, bad debts in commercial real estate and liquidity risks once again came to the surface.

Consumer staples became the only “safe haven,” with capital flowing into this sector at the fastest pace since July 2020.

Of course, technology stocks also saw a “bounce.” The TMT (technology, media, and telecommunications) sector posted its first net buy in four months. But Goldman Sachs clearly noted that this mainly reflects short-covering—investors that had been short technology stocks closed their positions after profiting from the decline, rather than establishing new long-term long positions. This technical buying masks deeper institutional concerns that technology stocks are overvalued.

Wall Street’s consensus: a liquidity trap is taking shape

The views of several investment banks are unusually consistent.

Charles Schwab analyst noted that, based on historical experience, when hedge funds’ pace of short selling reaches an extreme level like this, the market typically needs a very long repair period—3 to 6 months—to start searching for a bottom again.

Goldman Sachs’ strategy team, meanwhile, warned that the market is currently in the early stages of “deleveraging.” When high-leverage players such as hedge funds withdraw collectively, liquidity will dry up quickly. Even some minor negative catalysts can trigger significant volatility.

The bond market is pricing the same risks. The 10-year U.S. Treasury yield has risen from 3.96% on February 27 to around 4.30% now—although it eased slightly on Thursday as risk-aversion sentiment dipped. The 30-year fixed mortgage rate has climbed to 6.41%, up from 5.99% before the war.

In this once-in-13-years sell-off wave, hedge funds’ behavior is effectively providing a “risk survival guide.”

First, refuse to “catch falling knives.” When smart money exits at record speed, any judgment that something is “cheap on valuation” could be a trap. In a market where liquidity has dried up, there is no lowest price—only lower.

Second, focus on cash flow and defensive assets. Professional institutions have shifted into consumer staples and cash as a safe haven. Retail investors should also review their holdings: reduce leverage, increase cash, and allocate to anti-cyclical assets (gold, high-dividend staple categories of stocks).

Third, be prepared for the long-termization of geopolitics. The Middle East issue cannot be resolved overnight. If it evolves into a prolonged war of attrition, the global market’s pricing logic will shift completely from “growth-driven” to “safety-driven.” The “buy the dip” strategy that worked again and again over the past decade may already have stopped working.

U.S. markets are closed for trading on Friday, but uncertainty in oil prices and the Middle East situation is still building. Until the fog clears, staying cautious may be more important than any technical analysis.