Budapest Post

Cum Deo pro Patria et Libertate
Budapest, Europe and world news

Hedge Funds That Planned for Election Chaos See a Blue Wave

Hedge Funds That Planned for Election Chaos See a Blue Wave

For hedge fund managers, preparations for chaos in the U.S. elections are giving way to strategies to capitalize on a sweeping Democratic victory.

Just six days away from final voting, several top funds see former Vice President Joe Biden winning the presidency as well as the possibility of a so-called blue wave in which Republicans also lose control of the Senate.

Asset managers UBS O’Connor, Harvest Volatility Management and MKP Capital Management -- with a total of more than $12 billion in assets -- say the odds are that President Donald Trump will be unseated, and they have embraced an array of strategies from buying value stocks to betting on commodities to cash in on the outcome.

“We’ve been obsessing over this for the past three months,” said UBS O’Connor Chief Investment Officer Kevin Russell. “This election that was such a big and obvious risk event is turning into a much more benign scenario from a risk perspective.”

Yet for all the agreement on the direction of the election, funds are being cautious to ensure they keep the gains already made in a rough-and-tumble 2020. They aren’t going all-in on one big bet because there’s potential for a late-campaign surprise -- as recent election history has shown -- or a contested result.

As a group, hedge funds have a spotty record at forecasting markets in recent years. The $3.3 trillion industry’s returns trail the S&P 500 in 2020 and lagged behind the U.S. stock index in four of the six prior years, according to data compiled by Bloomberg.

Hedge fund managers appear to be tracking the sentiment on Wall Street. The Cboe Volatility Index -- known as the equity market’s “fear gauge” -- has been relatively subdued this month, in large part because traders are wagering on a Biden win. While some Wall Street analysts are focusing on potential benefits from the Democrats’ agenda, such as an increase in fiscal stimulus, others have raised concern that its tax increases could hurt corporate profits.

Billionaire investor Stan Druckenmiller said at a conference Tuesday that a sweep by Democrats and the specter of higher taxes and inflation will weigh on equities in coming years.

Poll aggregator FiveThirtyEight’s forecasting model gave Biden an 88% chance of winning the Electoral College as of Tuesday, though concerns linger that a tight race could lead to a contested legal fight given the polarized electorate, a record number of mail-in ballots and Trump’s hurling of unsubstantiated charges of voter fraud.

UBS O’Connor’s algorithms put a better than 50% chance on a blue wave, Russell said in an interview. The UBS Group AG unit’s $2.4 billion multi-strategy hedge fund had, as of Oct. 27, modestly pivoted toward value-oriented industrial stocks such as those in the steel and materials sectors, which could benefit from Biden’s $2 trillion infrastructure and green-energy plan.

Josh Silva, a portfolio manager at Harvest Volatility Management, said he is long commodities and small-cap stocks because they could get a boost from a Democratic sweep.

Scott Bessent, head of Key Square Capital Management, told investors in a letter that the probability of a Biden win that’s confirmed within 72 hours of the polls closing on Nov. 3 is about 50%. In the event of a blue wave, he’d be short U.S. 10-year Treasurys as well as 30-year notes, he said.

Bessent also said he’d go long the yen, the yuan (along with 5-year China government bonds), the Mexican peso and a basket of currencies including the South African rand, the Colombian peso and the Brazilian real (along with 5-year bonds). Stock wagers would include Chinese shares and a basket of industrials, transports, homebuilders and commodity producers, he said.

Managers may be relieved when the contest is over -- and with good reason. Over the past two decades, hedge funds have performed better on average in the three months after a U.S. presidential showdown than in the three months prior, according to research firm PivotalPath.

Macro hedge fund MKP Capital, which managed $2.2 billion as of the end of 2019, also believes the election will be a boon for risk assets regardless of the outcome -- as long as the Phase III trials for a Covid-19 vaccine prove successful, according to an Oct. 21 letter to investors. The firm’s base-case scenario is a blue sweep that, paired with early approval of a vaccine, would see at least 10% added to equities, the letter says.

Broad Reach Investment Management sees a Biden victory as the likeliest outcome, the firm told investors in a third-quarter letter. That could boost emerging markets by calming the “unpredictability and volatility” fueled by Trump, the macro fund wrote. Expansive fiscal policy, especially if the Democrats take the Senate, coupled with a recovery from Covid-19 might “super-charge” returns from the developing world, according to the firm.

Volatility Bets


Some funds are trading around volatility itself.

“That is a reasonable play where you don’t have to take a position on the election directionally,” said Jonathan Caplis, PivotalPath’s chief executive officer.

Brevan Howard Asset Management, which this month acquired a 25% stake in volatility hedge fund One River Asset Management, has been long volatility for most of the year. While the firm sees a “significant probability” of a Democratic sweep, it also points to a 15% to 20% chance of a contested election that could push a resolution into January, according to an October letter seen by Bloomberg.

Potential turbulence has others treading cautiously. Many discretionary global macro funds have curbed risk by reducing leverage or putting on hedges, Caplis said.

Equity funds also are cutting exposure, said Darren Wolf, who oversees $14 billion as head of alternative investment strategies for the Americas at Aberdeen Asset Management. Memories of 2016 are raw after many investors were wrong about both the election result and the market reaction. They’re wary of a dispute this time.

“The scariest thing would be uncertainty over the outcome,” Wolf said.

Savoie Capital, a $1.2 billion asset manager for family offices, is focusing on policy-related trades for any outcome, chief investment strategist Ben Phillips said. It’s increased wagers on infrastructure companies such as Evoqua Water Technologies Corp. and Construction Partners Inc., which he expects to benefit from spending under either administration.

Zachary Squire, CIO at systematic macro hedge fund Tekmerion Capital Management, expects that whichever candidate wins, the yield curve will steepen as growth and inflation pick up in the U.S. His fund is going short U.S. interest rates versus those of slower-growing Japan and Australia.

“Given the equity markets have run as far as they have, yields are the under-appreciated opportunity,” he said.

AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.
Newsletter

Related Articles

0:00
0:00
Close
Declining Beer Consumption Signals Cultural Shift in Germany
Emails Leaked: How Passenger Luggage Became a Side Income for Airport Workers
Polish MEP: “Dear Leftists - China is laughing at you, Russia is laughing, India is laughing”
Western Europe Records Hottest June on Record
BRICS Expands Membership with Indonesia and Ten New Partner Countries
Elon Musk Founds a Party Following a Poll on X: "You Wanted It – You Got It!"
China’s Central Bank Consults European Peers on Low-Rate Strategies
France Requests Airlines to Cut Flights at Paris Airports Amid Planned Air Traffic Controller Strike
Poland Implements Border Checks Amid Growing Migration Tensions
Emirates Airline Expands Market Share with New $20 Million Campaign
Amazon Reaches Milestone with Deployment of One Millionth Robot
Yulia Putintseva Calls for Spectator Ejection at Wimbledon Over Safety Concerns
House Oversight Committee Subpoenas Former Jill Biden Aide Amid Investigation into Alleged Concealment of President Biden's Cognitive Health
Amazon Reaches Major Automation Milestone with Over One Million Robots
Extreme Heat Wave Sweeps Across Europe, Hitting Record Temperatures
Meta Announces Formation of Ambitious AI Unit, Meta Superintelligence Labs
Robots Compete in Football Tournament in China Amid Injuries
China Unveils Miniature Insect-Like Surveillance Drone
Marc Marquez Claims Victory at Dutch Grand Prix Amidst Family Misfortune
Germany Votes to Suspend Family Reunification for Asylum Seekers
Budapest Pride Parade Draws 200,000 Participants Amid Government Ban
Southern Europe Experiences Extreme Heat
Xiaomi's YU7 SUV Launch Garners Record Pre-Orders Amid Market Challenges
Jeff Bezos and Lauren Sanchez's Lavish Wedding in Venice
Russia Launches Largest Air Assault on Ukraine Since Invasion
Massive Anti-Government Protests Erupt in Belgrade
Iran Executes Alleged Israeli Spies and Arrests Hundreds Amid Post-War Crackdown
Hungary's Prime Minister Criticizes NATO's Role in Ukraine
EU TO HUNGARY: LET THEM PRIDE OR PREP FOR SHADE. ORBÁN TO EU: STAY IN YOUR LANE AND FIX YOUR OWN MESS.
Hungarian Scientist to Conduct 30 Research Experiments on the International Space Station
NATO Members Agree to 5% Defense Spending Target by 2035
NATO Leaders Endorse Plan for Increased Defence Spending
U.S. Crude Oil Prices Drop Below $65 Amid Market Volatility
International Astronaut Team Launched to Space Station
Macron and Merz: Europe must arm itself in an unstable world
Germany and Italy Under Pressure to Repatriate $245bn of Gold from US Vaults
Iran Intensifies Crackdown on Alleged Mossad Operatives After Sabotage Claims
Trump Praises Iran’s ‘Very Weak’ Response After U.S. Strikes and Presses Israel to Pursue Peace
Oil Prices Set to Surge After US Strikes Iran
BA and Singapore Airlines Cancel Dubai Flights Amid Middle East Tensions
Trump Faces Backlash from MAGA Base Over Iran Strikes
Meta Bets $14 B on Alexandr Wang to Drive AI Ambitions
FedEx Founder Fred Smith, ‘Heart and Soul’ of the Company, Dies at 80
Chinese Factories Shift Away from U.S. Amid Trump‑Era Tariffs
Pimco Seizes Opportunity in Japan’s Dislocated Bond Market
Labubu Doll Drives Pop Mart to Status as China’s Most Valuable Toy Maker
Global Coal Demand Defies Paris Accord Goals
United States Conducts Precision Strikes on Iran’s Nuclear Sites
US strikes Iran nuclear sites, Trump says
Telegram Founder: I Will Leave My Fortune to Over 100 of My Children
×