NEW YORK (Reuters) -Global equities long/short hedge funds missed out on most of a massive rally in U.S. stocks on Wednesday triggered by U.S. President Donald Trump's announcement of a pause on some tariffs for 90 days.

The funds were up 0.98% on the day, while the S&P 500 soared 9.5%, according to numbers compiled by Morgan Stanley sent to clients. U.S. hedge funds posted higher gains, up 2.28%, but still underperformed the index.

In a sudden U-turn, Trump paused tariffs on Wednesday following a day when U.S. Treasuries sold off and showed signs of dislocations as investors feared the new trade policy could drive the world's largest economy into a recession. After his announcement, stocks rallied and Treasury yields pared back some of their gains.

The rally, which came as a surprise for market participants, caught hedge funds with increased short positions, or bets that stock prices would fall.

Last week, hedge funds underwent the largest selling on a net basis in almost 15 years on Thursday, while also turning the most bearish since 2011, according to Goldman Sachs.

With a reduced portfolio of long positions - betting prices would go up -, hedge funds did not take much advantage of the rally.

"Some of the activity (on Wednesday) was down to hedge funds covering their shorts after Trump's 90-day pause announcement," said Jon Caplis, CEO of hedge fund research firm PivotalPath.

Still, long/short hedge funds are outperforming the S&P in 2025. Year-to-date through April 10, global funds were down 3.14%, while U.S. funds fell 4.07%. The S&P 500 dropped 6.9% in the same period.

Morgan Stanley's numbers also showed that portfolio managers continued to cut leverage in their portfolios. Amid uncertainty around tariffs, hedge fund managers have slashed positions to reduce risk.