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Research

Hedge funds readying or US elections

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The US presidential campaign has begun in earnest, with voting in the primaries already underway. Markets are awaiting the choice of Trump’s ultimate rival. The dynamics of the Democratic party primaries should be clearer by the end of March, with 60% of the pledged delegates distributed. If a Democratic frontrunner does not emerge by then, markets might have to wait until the official end of the primaries in June. The Bernie Sanders campaign seems to be gaining traction, while Pete Buttigieg and Mike Bloomberg appear to be capturing their share of Biden’s defecting voters. Upcoming primaries will be crucial for Biden and may offer the last chance for his candidacy to pick up steam.

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Hedge funds readying or US elections
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For now, US equities price limited election risk, as our US elections basket shows. Markets seem to favor a second Trump term and believe he will ultimately win, at odds with polling on a national level and in battleground states, but consistent with online bets. Seen as an easier opponent than Biden or Bloomberg, Sanders and his breakaway success have not started worrying markets yet. How ‘centrist’ vs. ‘progressive’ Democratic forces evolve might ultimately determine the magnitude of the risk premium. In any event, the Super Tuesday primaries on March 3rd will probably be decisive.

Reports from US focused L/S Equity and Event Driven managers also suggest they expect a second Trump term. However, given the limited risk premium, they are predicting a surge in volatility by March. Some candidates are supporting radical changes, including an overhaul to the healthcare system, breaking up big banks and tech firms, banning fracking, and increasing wages while imposing higher wealth and corporate taxes. They expect healthcare, energy, defense, financial and tech sectors to be the most sensitive to election trends. Some managers are shaving off exposures to these sectors while others are enhancing their hedges, using long-dated options, which are still affordable for the time being. As volatility rises, they also expect opportunities could emerge from oversold stocks, given the resistance that any radical policy shifts would meet from Congress. Moreover, any of these changes would take significant time to implement, giving companies some time to adapt. Event Driven managers see corporate activity accelerating ahead of the elections, as companies strive to benefit from the current environment while it lasts—a reoccurring pattern if past is precedent.

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