For a hedge fund that is financing asset holdings in the repo market, mechanically, a rise in haircuts that is not offset by either slack in the existing equity capital base or an infusion of fresh equity capital will cause the fund to liquidate assets. A collective trend to liquidate assets cannot happen unless prices drop.
But a fall-off in asset prices devalues the collateral that is pledged in parallel leveraged operations and more margin calls are triggered. So, the original funding liquidity shock turns into an asset market liquidity shock. The latter then retroacts into a more severe and widespread funding liquidity problem.