Protecting the downside: how hedge funds shield against tariff turbulence

Once again, U.S. President Donald Trump is dominating global headlines—this time with economic policies that carry broad global consequences. His focus on aggressive tariff strategies has injected sharp volatility into markets, with abrupt sell-offs followed by relief rallies, reflecting the unpredictable nature of current trade dynamics. 

South Africa, deeply integrated into global trade networks, has not been immune. The South African economy faces both direct exposure and second-order effects from tariff-related tensions, particularly given that two of its largest trading partners are the United States and China. These developments have rattled investor sentiment and highlighted the structural vulnerabilities of an interconnected global economy. 

In such environments, traditional investment strategies often falter. Hedge funds, however, are uniquely positioned and well-equipped to thrive from such volatility. Their ability to employ active, tactical strategies allows them not only to manage risk but also to exploit market dislocations.

At the core of this advantage is flexibility. Hedge funds operate with broad investment mandates, fewer regulatory constraints, and the ability to deploy leverage and sophisticated instruments.

This enables them to respond in real time to shifting market narratives—adjusting exposure across currencies, commodities, and equities as trade flows, interest rates, and policy risks evolve. In doing so, they transform market volatility into opportunity, positioning themselves as invaluable assets in times of economic uncertainty. This stands in stark contrast to long-only funds, which are constrained by their focus on long-term holdings and typically suffer during periods of market upheaval.

Derivatives, in particular, play a critical role. Hedge funds can deploy these sophisticated financial instruments—such as options, futures, and swaps—that are typically unavailable to traditional investment managers.

These tools allow them to respond quickly to market changes and hedge against various risks. Tariffs trigger currency fluctuations, which hedge funds can exploit through strategic foreign exchange positions or by hedging currency exposure for local companies tied to global markets. Derivatives also provide the potential to amplify returns in volatile conditions. Recent weeks have seen a rise in gold prices as investors seek out safe-haven assets.

Using futures and options, hedge funds can gain leveraged exposure to gold, controlling larger positions with smaller capital outlays and hedging against broader market declines or currency devaluations. These advanced strategies not only protect portfolios but also unlock opportunities in uncertain environments.

Equally powerful is the ability to short. The recent market reactions to tariff announcements, even when based on speculation, have demonstrated how quickly financial sentiment can turn.

During periods of economic disruption, hedge funds can strategically short overvalued stocks, sectors, or entire markets that are vulnerable to trade-related fluctuations.

This flexibility allows hedge funds to capitalize on downturns by profiting from falling asset prices.

While long-only funds are limited to benefiting from rising markets, hedge funds can use shorting strategies to offset losses in other areas of their portfolios, offering a counterbalance in times of uncertainty.

At their core, hedge funds are designed to generate returns while managing downside risk—an objective few other investment vehicles can truly deliver on.

As global trade tensions continue to unfold, investors would be prudent to ensure they have the most adaptable and resilient tools at their disposal.

Hedge funds, with their ability to short markets, hedge currency risk, and capitalize on volatility, offer exactly that. In times of economic uncertainty, flexibility is not a luxury—it is a necessity.

Marina Kotsopoulos, Senior Business Analyst at AG Capital (Pty) Ltd. 

BUSINESS REPORT