Lethu Zulu, Head of Hedge Funds at Sanlam Investments Multi-Manager

When markets convulse under the weight of geopolitical shocks, hedge funds are often called upon to prove why they exist. The month of March, defined by the sudden escalation of conflict between the United States/Israel and Iran, offered a vivid test of that proposition. The results were nuanced: while much of the industry felt real pain alongside traditional portfolios, a subset of hedge funds demonstrated exactly the kind of defence, agility, and opportunism that justifies their place in a diversified allocation.

A market shock with few hiding places

The scale of the disruption was severe. Following coordinated US and Israeli strikes on Iran on 28 February, Brent crude surged more than 30% in the weeks that followed, briefly approaching US$120 a barrel. The S&P 500 fell roughly 5% year-to-date in US dollars by mid-March, while the MSCI World Index declined more than 3% also in US dollars from the start of the conflict. Closer to home, the JSE Top 40 lost nearly 15% in rands over the period, its worst stretch since 2008, as surging oil prices fuelled inflation fears and triggered a sell-off in mining and banking stocks. The simultaneous decline in equities and bonds left traditional balanced portfolios with few places to hide.

A mixed picture for hedge funds

It would be dishonest to suggest that hedge funds sailed through the crisis unscathed. The industry overall was down approximately 2.2% in US dollars in March, and long/short equity funds ‒ a core hedge fund strategy that bets on stocks going up or down ‒ were down by roughly 3.4% also in US dollars. Even strategies typically expected to benefit from volatility struggled: global macro funds and trend-following commodity trading advisers both declined around 3% likewise in US dollars, wrong-footed by the speed and severity of the shock.

Several marquee multi-strategy platforms reported losses in the first week of the conflict. Citadel’s flagship Wellington fund was down by roughly 2%, Balyasny shed 3.5%, and Marshall Wace’s Eureka fund was down 3.7% all figures in US dollars.

While data isn’t as freely available in South Africa, we do have a view on the incumbent managers in our portfolio. The managers who have struggled are the more aggressive players who offer beta-plus mandates or those who structurally have a lot more volatility and higher return targets than most. This, however, is not surprising and falls within our expectations for these types of managers, as they were the ones who benefited most when markets were favourable in 2025.

Where the playbook worked

Yet within the industry’s broader drawdown, there were striking pockets of outperformance that illustrate the value of active, flexible mandates. RCMA Capital’s Merchant Commodity Fund returned 9.5% in US dollars in the five days through 6 March, pushing its year-to-date gains to around 20%. Pierre Andurand’s fund gained 6%  also in US dollars in early March, and energy-focused Saber Capital added 6.7% in the same currency in a single week, lifting its 2026 return to 12%.

What these funds had in common was not a single strategy, but a willingness to position actively around the crisis. Some had built commodity exposure ahead of the escalation. Others leaned into energy volatility as it unfolded. The common thread was conviction-driven positioning combined with disciplined risk management; the core attributes that hedge funds are supposed to deliver, and which these managers did.

Locally, most managers demonstrated strong risk awareness and proactive positioning ahead of or during the March 2026 market drawdown triggered by Middle East geopolitical tensions. Most funds delivered clear outperformance versus the broader market during the sell-off period, highlighting effective downside protection mechanisms. This was mainly due to defensive positioning and hedges enacted towards the end of February as managers became increasingly concerned by the visible build-up of naval assets in the Persian Gulf.

The flexibility advantage

The defining trait of hedge funds that navigated this period well was their flexibility. Rather than riding markets passively, they actively reshaped their exposures. Many reduced risk quickly, trimming high-beta equities, raising cash, and layering in protection through index shorts and put options. Others, particularly market-neutral strategies built for this kind of environment, combined relative value trades and trend-following programmes to sidestep directional risk.

Funds that had built defensive positions ahead of the crisis rotated quickly once valuations reset, moving from net short to net long in a matter of weeks. This ability to pivot, protecting capital during the storm, then leaning into repriced opportunities, underscored the dual mandate of well-managed hedge funds: resilience and return. This performance signature is difficult to replicate in portfolios constrained to long-only investments.

Capital preservation and manager selection

Capital preservation remained a vital anchor, supported by currency overlays, bond hedges, and pair trades that helped certain funds stay market-neutral while generating alpha. Selective allocations to commodities like gold and platinum group metals highlighted the balance between safety and structural demand, though even these trades required active management as gold’s initial safe-haven rally gave way to a sharp sell-off later in March as rising bond yields and a stronger dollar altered the calculus.

Diversification across strategies, combined with disciplined risk controls, ensured that well-constructed hedge fund allocations delivered smoother outcomes than broad equity indices. But the dispersion of returns across the industry reinforces a critical point: not all hedge funds are created equal.

In volatile, drawdown-prone environments, manager selection is the differentiator. The turbulence of early 2026 did not prove that hedge funds as an asset class are a guaranteed shelter. What it proved is that the right hedge funds, actively managed, well-positioned, and rigorously selected, remain one of the few vehicles able to protect capital while finding opportunity in the chaos.