Two Sigma Investments LP’s flagship onshore China macro fund continued its downward trajectory in April, deepening losses after March’s market turmoil tied to the Iran conflict pushed it to its worst monthly performance ever.

The fund, which focuses on macroeconomic strategies in Chinese markets, has been struggling to recover from the sharp selloffs triggered by geopolitical tensions. Investors are closely watching how the firm navigates the volatile environment, as the fund’s recent underperformance raises questions about its risk management and strategy adaptation.

March saw the fund record its largest monthly decline since inception, with losses exceeding 5% according to sources familiar with the matter. The downturn was largely attributed to unexpected moves in Chinese equities and currency markets following the escalation of the Iran war, which disrupted global risk appetite and hit emerging markets particularly hard.

In April, the fund extended those losses by an additional 2.3%, according to preliminary data shared with investors. This brings the year-to-date decline to roughly 7.5%, a stark contrast to the fund’s historical track record of steady returns. The firm has not publicly commented on the performance, but internal memos suggest that the macro team is reassessing its positioning across asset classes.

Two Sigma’s China operations have been expanding rapidly in recent years, with the firm managing over $5 billion in onshore assets as of early 2025. The flagship macro fund is one of the largest foreign-managed hedge funds in China, making its performance a bellwether for international investors in the region.

The losses come at a challenging time for the broader hedge fund industry, which has faced headwinds from rising interest rates, persistent inflation, and geopolitical instability. Many macro funds have struggled to generate alpha in an environment where traditional correlations have broken down.

For Two Sigma, the recent drawdown highlights the risks inherent in China-focused strategies, where regulatory shifts and sudden policy changes can amplify market moves. The firm’s quantitative models, which rely heavily on historical patterns, may have been caught off guard by the unique nature of the Iran-related volatility.

Despite the setbacks, some investors remain confident in Two Sigma’s long-term capabilities. The firm has a strong reputation for risk management and has previously recovered from similar drawdowns. However, the current stretch of losses could test investor patience, especially if the fund fails to regain momentum in the coming months.

Looking ahead, the fund’s performance will depend on how quickly Chinese markets stabilize and whether Two Sigma can adjust its models to account for the new geopolitical reality. The firm is reportedly increasing its focus on alternative data sources and scenario analysis to better anticipate tail risks.

For now, the extended tumble serves as a reminder that even the most sophisticated quantitative strategies are not immune to the unpredictable nature of global events. Investors will be watching the fund’s next moves closely, as the outcome could influence broader sentiment toward foreign-managed China funds.

Key Factors Behind the Decline​

The primary driver of the losses has been the Iran war’s impact on Chinese markets. The conflict led to a spike in oil prices, which weighed on Chinese equities, particularly in the energy and manufacturing sectors. The Chinese yuan also weakened against the dollar, hurting the fund’s currency positions.

Additionally, the fund’s long exposure to Chinese tech stocks suffered as the sector faced renewed regulatory scrutiny. The combination of these factors created a perfect storm for the macro strategy, which typically bets on broader economic trends rather than individual stock movements.

Investor Sentiment and Fund Outlook​

Investor redemptions have remained manageable so far, but the fund’s performance has prompted some clients to request more frequent updates and detailed risk reports. Two Sigma has responded by increasing transparency, providing weekly performance snapshots and holding regular conference calls with investors.

The firm is also exploring new hedging strategies to protect against similar shocks in the future. This includes expanding its use of options and derivatives to better manage tail risk, as well as diversifying into less correlated asset classes like commodities and real estate.

Broader Market Context​

The fund’s struggles are not isolated. Other macro hedge funds with China exposure have also faced losses, though few have been as severe. The $HSI, $CSI300, and $CNYUSD have all experienced heightened volatility since March, making it difficult for any strategy to generate consistent returns.

Regulatory changes in China, such as new rules on foreign fund managers and capital controls, have added another layer of complexity. Two Sigma has had to navigate these hurdles while maintaining compliance with both local and international standards.

What This Means for Investors​

For those considering investing in China-focused macro funds, the recent performance underscores the importance of diversification and risk management. While Two Sigma’s long-term track record remains strong, the current environment demands a cautious approach.

Investors should also consider the potential for a rebound. Chinese markets have historically recovered from geopolitical shocks, and the fund’s quantitative models could quickly adapt once conditions stabilize. However, timing such a recovery is notoriously difficult.

In the meantime, Two Sigma’s team is focused on preserving capital and positioning the fund for the next opportunity. Whether that will be enough to stem the losses remains to be seen, but the firm’s reputation suggests it has the resources and expertise to weather the storm.

Conclusion​

Two Sigma’s main macro China fund extending its tumble into April is a sobering reminder of the risks in emerging market investing. The combination of geopolitical turmoil, regulatory shifts, and market volatility has tested even the most sophisticated strategies. While the fund’s recent performance is disappointing, it is not necessarily a sign of long-term weakness. Investors will be watching closely to see how the firm adapts and whether it can regain its footing in the months ahead.

For now, the focus remains on risk management and transparency, as Two Sigma works to reassure clients and navigate one of the most challenging periods in its China operations. The outcome will have implications not just for the firm, but for the broader landscape of foreign investment in Chinese markets.