Markets saw two major movers in a row. Multiple moving pieces and cross winds are not making active managers’ job any easier. U.S. elections uncertainty is nearly behind, and Covid-19 vaccines suggest light at the end of the tunnel. Yet, the surge in virus cases might require further restrictions before a vaccine rolled out.
By then, some stimulus might be curtailed withdrawing some market support. Finally, the future of US policies remains tied to the January 5 Senate runoffs in Georgia. We review how U.S. elections and the vaccine news impacted hedge funds and how they reacted so far.
U.S. elections keep some suspense. While legal challenges and recounts are unlikely to change the result, Mr. Trump might strive to galvanize the Republican camp ahead of the runoffs in Georgia. Further polarizing political forces before the next administration could even celebrate, he might also seek to maintain his legacy. While a “blue wave” can’t be ruled out, a split Congress implies less stimulus than planned, but also less deficit and less policy uncertainties. A jammed legislative process would cripple the domestic agenda, favoring executive actions instead, with more room on foreign policies. Prospects of a large tax overhaul would fade, while climate and healthcare policies would be watered down.
A split Congress is becoming consensus, with rates adjusting to a milder reflation, while the dollar and Asian markets are pricing reduced trade spats, with manageable rotations in healthcare, clean energy and tech (until the vaccine news). This scenario probably means a positive cyclical tilt for equities, but investors would quickly re-focus on fundamentals.
Vaccine light at the end of the pandemic tunnel. The Pfizer/BioNTech announcement that their vaccine had reached 90% efficacy rates in late-stage clinical trials gave markets an adrenaline shot, with results from other vaccines to follow. Uncertainty remains regarding the large-scale efficacy rate, the share of population that will be vaccinated, and the time to spread it out given the technical constraints. They would determine how fast world economies normalize (probably not before H2 2021 and at an uneven regional pace). In the meantime, the global economy still faces a challenging winter.
What impact on hedge funds? Returns were positive in both cases. Already positioned for the outcome, all strategies were up after US elections, led by L/S Equity, Special Situation and Global Macro. Returns were milder and uneven after the vaccine announcement. It was most beneficial for Special Situation and L/S Credit strategies (boosted by their beta rather than by their alpha), but painful for CTAs and some Global Macro. L/S Equity returns were highly dispersed. Caught off guard, managers overweighing Growth and “work-from-home” stocks at the expense of Value and Covid-19’s prime victims were severely hit, especially in Europe given the extreme rally in financial and airlines stocks.
Long positions positively contributed but shorts faced a major squeeze, hitting Quant and Neutral strategies with a double whammy.
Have they altered their portfolios? CTAs have not substantially modified their exposures, still modestly short DM equities but adding to EM equities. They also kept their long dollar and bonds. Global Macro had raised equity exposures in October and only marginally added to them. They are shaving off their bond holdings, while remaining marginally long USD. EM and China hedge funds were cautious ahead of US elections but are now adding risk. L/S Equity portfolios were already positioned for US elections and were little changed thereafter, all the more so fiscal and tax policies remain uncertain. The knee-jerk reaction after the vaccine news was to cover shorts while reducing their long positions (lowering their gross exposures). Managers expect further portfolio tweaks until they settle towards an earlier end of the pandemic than expected.