Asian Hedge Funds Redirect Investments to Japan and India Amid U.S. Tariff Tensions, Reports Morgan Stanley

Morgan Stanley reports that Asian hedge funds are reallocating capital to Japan and India, reducing exposure in China and Australia, following U.S. tariff hikes. Japan and India are seen as resilient, with hedge funds focusing on materials, technology, and industrials in Japan, and anticipating a U.S. trade deal with India. China faces selling pressure due to its direct exposure to tariffs, with bearish bets on consumer stocks. Australia sees reduced interest due to its economic ties with China. Overall, hedge funds are cautiously re-entering markets with subdued leverage levels.

Hedge Funds Rebuild Positions in Japan and India

Morgan Stanley’s prime brokerage unit reported that Asian hedge funds began rebuilding their positions in Japan and India last week, following a sharp reduction in exposure earlier in April. The move comes after U.S. President Donald Trump announced sweeping tariffs on April 2, dubbed “Liberation Day” tariffs, which triggered a broad selloff across Asian markets.

Japan and India emerged as relative safe havens during the market turmoil. Japan’s benchmark Nikkei 225 index has already recovered all losses incurred since the tariff announcement and is slightly up for the month. Indian equities have also rebounded strongly, with the NIFTY 50 index rising more than 3% in April.

Morgan Stanley noted that hedge funds were particularly active in Japan’s materials, technology, and industrials sectors. In India, the renewed interest is attributed to expectations that the country could successfully negotiate a trade deal with the U.S., especially after Washington announced a 90-day pause on tariffs for most countries—excluding China.

Reduced Exposure in China and Australia

In contrast, hedge funds have been reducing their positions in China and Australia. The pullback in China has been especially pronounced, with Morgan Stanley reporting that funds either sold off or added bearish bets against Chinese consumer discretionary stocks. The move coincides with the U.S. raising tariffs on Chinese imports to 145%, prompting Beijing to retaliate with 125% levies on U.S. goods.

A separate note from Goldman Sachs corroborated the trend, indicating that Chinese equities led net selling flows by hedge funds in Asia through April 24. The selling was concentrated in Hong Kong-listed and U.S.-listed Chinese shares.

Australia also saw a reduction in hedge fund exposure, although the report did not specify sectoral details. The country’s close economic ties with China and its exposure to global commodity markets may have contributed to the cautious stance.

Taiwan Sees Short-Covering Activity

While Japan and India attracted fresh capital, Taiwan experienced a different kind of activity. According to Morgan Stanley, hedge funds were net buyers in Taiwan, but the purchases were largely driven by short-covering rather than new long positions. This suggests that while funds are reducing risk, they are not yet confident enough to initiate aggressive new bets in the Taiwanese market.

Leverage Levels Remain Subdued

Despite the renewed buying in select markets, Morgan Stanley emphasized that overall hedge fund leverage remains “far below pre-tariff selloff levels.” This indicates that while funds are re-entering the market, they are doing so cautiously, with a focus on risk management amid ongoing geopolitical uncertainty.

Investor Sentiment and Trade Negotiation Hopes

Investor sentiment appears to be influenced by the belief that Japan and India are better positioned to navigate the current trade environment. Morgan Stanley’s note highlighted that investors are betting on these countries to successfully negotiate trade agreements with the U.S., especially in light of the temporary tariff reprieve extended to most nations except China.

This optimism has translated into targeted buying in sectors that are expected to benefit from trade realignments and domestic economic resilience. In Japan, the focus on materials, tech, and industrials reflects confidence in the country’s export-oriented industries. In India, the broader market rebound suggests a belief in the country’s macroeconomic stability and policy continuity.

China Faces Headwinds from Trade War Fallout

China, on the other hand, is grappling with the direct consequences of the escalating trade war. Economists cited by Morgan Stanley expect macroeconomic data from China to show signs of weakness in the second quarter, as the impact of the tariffs begins to filter through the economy.

The bearish sentiment is further reinforced by the nature of the hedge fund activity. Rather than rotating into defensive sectors, funds are actively betting against consumer discretionary stocks, indicating a lack of confidence in domestic consumption trends amid rising trade barriers.

Market Context and Broader Implications

The reallocation of hedge fund capital across Asia underscores the shifting dynamics in global investment flows triggered by geopolitical developments. While Japan and India are benefiting from their perceived insulation from the U.S.-China trade conflict, China’s central role in the dispute has made it a focal point for risk-off strategies.

Australia’s decline in hedge fund interest may reflect broader concerns about its economic exposure to China and global commodity cycles. Meanwhile, Taiwan’s short-covering activity suggests that investors are still navigating the region with caution, awaiting clearer signals before committing to new positions.

References

• Asia hedge funds add Japan, India after tariff shock, says Morgan Stanley
• Asia hedge funds add Japan, India after tariff shock, says Morgan Stanley