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How hedge funds are preparing for US election as Trump-Sanders battle looms

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Hedge funds are positioning for a spike in volatility in healthcare, energy, financials and tech as the US presidential election gathers pace.

US-focused long/short equity and event driven managers forecast Donald Trump winning a second mandate in November’s poll, according to research by Lyxor Asset Management.

But with certain Democratic candidates, including Bernie Sanders, promising sweeping changes to the healthcare and banking systems, a ban on fracking, and increases in wealth and corporate taxes, along with higher wages, certain industries – including healthcare, energy, defence, financial, and tech – are more sensitive to the elections.

“Some managers are shaving off exposures to these sectors, others are enhancing their hedges, using long-dated options, which are still affordable,” Lyxor analysts said in a note this week.

“They also expect that opportunities from oversold stocks could emerge, given the resistance that any radical policy shifts would meet in Congress. Moreover, they expect that any of these changes would take time to implement.”

Lyxor added: “Event driven managers see corporate activity accelerating ahead of the elections, as companies strive to benefit from the current environment while it lasts – a pattern that has often occurred in the past.”

US equities have priced limited election risk, analysts said – though volatility could surge next month amid the ‘Super Tuesday’ primaries on 3 March, which may prove decisive.

Lyxor said the outcome of the centrist-progressive wrangle in the Democrats will “determine the magnitude” of market risk premium, with Sanders seen as an “easier opponent than Biden or Bloomberg”, and therefore “not worrying” for markets for now.

“Sanders’ campaign seems to be gaining traction, while Buttigieg and Bloomberg appear to be capturing their share of Biden’s scattering votes. The next primaries may be crucial for Biden to pick up steam,” the note observed. “If a Democratic frontrunner does not emerge by then, markets might have to wait until the end of the primaries in June.”

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