The first quarter of 2026 separated the resilient hedge funds from the exposed ones, as Middle East conflict and AI-driven tech selling tested multistrategy portfolios.
Dmitry Balyasny's $33 billion hedge fund lost 4.3% in March, bringing its first-quarter decline to 3.8%, one of the steepest drops among major multistrategy firms. London-based LMR Partners fell 2.4% in its flagship fund during the same month, while Walleye Capital shed 1.3%. These were not isolated missteps. They reflected a broader pattern in which some of the most heavily resourced investment firms in the world found themselves on the wrong side of fast-moving geopolitical and technological shifts.
As Business Insider recently reported, the damage was far from uniform. Schonfeld Strategic Advisors, managing $19 billion in assets, held flat in March and stayed positive for the year at 0.9%. Asia-based Dymon Asia and Pinpoint Asset Management each posted sharp March losses of 4.3% and 2.5% respectively, yet both remained in the green for 2026 overall, with Dymon up 6% and Pinpoint up 4%. North Rock also stayed positive at 2.1% for the year despite a modest 0.7% March dip. The divergence tells you something important: portfolio construction and regional exposure mattered enormously this quarter.
Two overlapping forces caught managers off guard. The first was the American and Israeli military strikes on Iran, which sent energy prices surging and ripped through macro trades across Europe and the UK. Many macro-oriented teams within multistrategy funds had positioned for short-term interest rate cuts in those regions. When inflation expectations jumped on higher oil and gas costs, that consensus trade reversed violently. It was a classic crowded-position problem, where too many smart people were leaning on the same assumption, and the market punished them simultaneously when the thesis broke.
The second force came from an entirely different direction. A sharp sell-off in software stocks earlier in the quarter, fueled by the rapid advancement of AI tools from companies like Anthropic, hit equity-focused pods hard. The perception that generative AI could displace legacy software revenues drove investors out of established tech names at speed. This is not a new narrative, but the intensity of the repricing surprised even managers who had been tracking AI disruption closely. It underscored a point that startup founders and public market investors alike are being forced to reckon with: the gap between AI hype and real-world adoption is closing fast, and markets are re pricing accordingly.
Meanwhile, the S&P 500 dropped 4.6% in the first quarter, its worst performance since 2022. For context, that compares poorly to the index's 10.2% gain in the first quarter of 2025, illustrating just how sharply sentiment has shifted. The irony for the hedge fund industry is that most multistrategy firms still managed to outperform that benchmark, even when their absolute returns disappointed. When your fund is down nearly 4% and you are still beating the market, it says more about the market than the fund.
What This Means for the Second Quarter
Multistrategy funds have grown dramatically in recent years, pulling in hundreds of billions in assets and paying top portfolio managers eight-figure guarantees to run specialized teams. Their core pitch is consistency: spread capital across dozens of strategies, limit losses in downturns, and deliver steady single-digit or low-double-digit returns regardless of what markets do. The first quarter tested that promise, and for firms like Balyasny and Walleye, the results were humbling.
The firms that navigated the turbulence best, Schonfeld, Dymon, Pinpoint, share a few traits. They either had lighter exposure to the macro rates trades that blew up, or their Asia-focused portfolios were buoyed by different economic dynamics. For startups and tech companies watching from the sidelines, the lesson is worth noting. When capital markets get choppy and major funds post losses, risk appetite tightens quickly. Venture rounds take longer, valuations face more scrutiny, and the cost of capital creeps upward. The AI-driven software sell-off also signals that public market investors are becoming more discriminating about which companies genuinely benefit from AI adoption and which ones are vulnerable to it.
Looking ahead, much depends on whether the Middle East conflict stabilizes or escalates. Energy prices remain the single largest variable hanging over inflation expectations, interest rate trajectories, and by extension, the macro trades that dominate multistrategy fund portfolios. If tensions ease and rate-cut expectations return, several of the funds currently in the red could recover quickly. If the conflict drags on, expect more pain and a broader shift toward defensive positioning that ripples well beyond the hedge fund world.
