Hedge funds “relatively prepared” for contested election result

Some hedge fund managers fear that a contested outcome in tomorrow’s US presidential election, followed by a prolonged wrangle over the final result, may not be priced in to markets to the degree that it should be.

Jim Neumann, partner and chief investment officer at Sussex Partners, suggested market sentiment – based on conversations with managers and opinion poll analyses – sees a Joe Biden victory as the likeliest outcome, followed next by a contested result. A Trump re-election on 3 November is seen as the least likely scenario. 

But some hedge fund managers are concerned that a contested result “may cause more market upset”, according to Neumann, who added that PMs have “gone through their books carefully to make sure they don’t have any unintended bets” in such a scenario.

“Managers are relatively prepared for this,” he told Hedgeweek. “They want to make sure that their positions that are generally fundamental in nature don’t have a big bias – a portfolio-wide bias – towards any particular outcome.”

Though Democratic challenger Biden remains in front, there remains some skepticism that the polls do not fully reflect a tighter race. As a result, in the short term, hedge fund strategies of all stripes are avoiding being heavily skewed towards certain areas that may benefit one way or another.

“That doesn’t mean they won’t put that risk on one way or another once the results are out – that’s their job. But they’re trying to ensure they don’t have these giant bets that can be hurt one way or another,” Neumann explained.

He added that even managers running more directional strategies, who are “in the business of carrying more directional risk”, do not relish carrying that level of risk heading in to such a binary-outcome event.

“The idea is that these guys can weather the storm here, as active managers, better than a passive exposure. They can be reactionary as they need to be reactionary but also go in with what they believe to be a pretty balanced position that isn’t going to be hit by any one particular outcome.”

With Biden enjoying a consistent, if narrow, lead in the polls, hedge fund managers believe a victory for Donald Trump – coupled with the Republicans retaining control of the senate – is the least likely scenario, and therefore would cause the biggest shockwave in the market.

“People don’t want to get wrong-footed on that front either,” he observed.

Market observers acknowledge there are shades of grey stemming from the prospect of a Democrat victory, over issues such as taxation and the regulatory environment.

“With corporates, you probably want to have some window into distressed and get short credit, while equity market neutral is a little more risk off with Trump. The question is how long that risk-off sentiment lasts,” Neumann said.

Pointing to the broader perception that the Democrats are a higher taxation, less business-friendly party, he added:  “The secondary issue that managers are grappling with is not necessarily who will win the presidential election, but who’s going to control congress. Is the tail going to wag the dog? If congress is controlled by the Democrats, and furthermore the party is controlled by the more progressive Democrats, then the market may have a problem with that.”