LONDON, March 11 (Reuters) - Hedge funds fleeing

positions intensified towards the end of last week and may

continue to dent European hedge fund managers' returns, a

JPMorgan ( JPM ) note to clients seen by Reuters on Tuesday

showed.

Hedge funds unwound positions in single stocks on Friday at

the largest amount in over two years, with some activity

comparable to March 2020, when portfolio managers cut market

exposure during the pandemic.

European shares fell on Tuesday after Monday's sharp

sell-off on U.S. growth concerns, and concerns about whether

Germany's fiscal reforms might fail or be watered down.

When equities are sold in large sizes this can push down

stock prices and impact market values. When funds large and

small crowd into the same positions, larger funds selling stocks

in bulk can trigger other smaller funds to exit their positions

to mitigate their losses, as well.

"Smaller hedge fund managers face a precarious situation

when large U.S. multi-strategy funds deleverage," said Bruno

Schneller, managing director at Erlen Capital Management.

Smaller managers often have less money to trade with and

rely on more concentrated positions to generate returns. When

bigger funds sell stocks in bulk, the ability to buy and sell

quickly can dry up, especially for less liquid stocks, said

Schneller.

"Smaller managers are like dinghies in the wake of a

supertanker-when the big funds shift course, the turbulence can

capsize them. Their limited resources and flexibility make them

particularly vulnerable to these cascading effects," said

Schneller.

Stock pickers and multi-strategy hedge funds trading

different asset classes have been forced to let go of positions,

said the JPMorgan ( JPM ) note.

European hedge fund managers with short positions against

companies were also hurt by bigger funds buying back their short

positions, the note added.

Hedge funds also take short bets, wagering that asset prices

will fall. But when they need to ditch these positions, they buy

back the stock, which if buying is big enough, can elevate stock

prices.

The risk that too many people were crowded in certain

trading positions had not completely eased, said the JPMorgan ( JPM )

note.

Stock pickers that JPMorgan ( JPM ) tracks finished February roughly

down 2.5% and were so far, 1.6% down for 2025. Multistrategy

funds tracked by the bank were down on average 1.7% for February

and 1.6% for 2025 so far.

European markets are fragmented post-Brexit, with thinner

trading volumes and less active participation from long-term

investors, he added.

"A deleveraging shock could ripple across borders, hitting

smaller exchanges harder and potentially sparking a feedback

loop of forced selling. Banks, already cautious amid monetary

tightening, might pull back further, exacerbating the strain,"

said Schneller.