What do you think of this electoral strategy? It might be wise to sell your winning stocks now to maintain liquidity this fall and make aggressive purchases when the political race heats up.
This is exactly what hedge funds have been doing since May, even as the market continued to reach record highs. Their net leverage, often seen as a gauge of risk appetite, dipped to 54% in early July, the lowest level since January, according to Goldman Sachs Group Inc.
Currently, hedge funds hold the lowest weighting in technology, media, and telecommunications sectors ever recorded, following two months of selling off the most lucrative stocks in the market.
This situation doesn’t sit well with authoritarian figures.
Professional and critical journalism is a fundamental pillar of democracy, and it tends to irritate those who believe they own the truth.
In Wall Street’s current climate, there has been a noticeable increase in transactions betting on Trump’s success. However, this is not necessarily a bearish move. Instead, informed investors are preparing for a tumultuous presidential campaign, ensuring they have cash on hand to deploy as market volatility rises and stock prices fluctuate.
According to Jonathan Caplis, CEO of hedge fund analysis firm PivotalPath, “Managers need to keep powder dry for potential dislocations around the U.S. elections. The net selling is merely a strategic profit-taking move—it’s more about hitting the brakes than a rush for the exits.”
It’s clear why traders are gearing up for a volatile election season. Democrats are still deliberating on who to nominate while calls for President Joe Biden to withdraw his candidacy due to concerns over his age and frailty continue to grow. On the Republican side, former President Donald Trump’s proposed economic plan, which includes tax cuts, increased tariffs, and immigration restrictions, raises worries about inflation rebounding and a weakening of U.S. finances.
Events that are known but have unpredictable outcomes create a trading environment characterized by increased dispersion. This means the potential range of outcomes for individual stocks widens, something hedge funds typically favor as they often take both long and short positions in their strategies.
Given the uncertainty, some traders anticipate that the campaign will impact the stock market sooner than usual. Adam Singleton, investment director of external alpha at Man Group Plc, mentions, “What we’ve been hearing from hedge funds this year is that the election story might unfold much sooner than November. It’s wise portfolio management to reduce risk linked to uncertain binary events.”
Hedge funds usually decrease their exposure to stocks before presidential elections. They tend to leverage back up quickly before the vote and increase their positions thereafter. Current net exposure remains above the long-term average for an election cycle, suggesting there’s still room to sell.
Caplis notes, “Typically, many things happen around these major events that are acted upon first and analyzed later.”
Hedge funds often navigate political events in various ways. One strategy involves a sectoral perspective where managers identify themes likely to benefit under each candidate, reducing exposure prior to the vote and then focusing on the winning theme afterward. Another approach is to gauge the overall market’s risk appetite, indicating the trajectory of stock prices. In this case, funds lower their net exposure and aim to assess investors’ perceptions of the likely winner. This wait-and-see method proved effective in 2016, where markets were expected to fall if Trump won, but instead rose following his victory.
There is also a more high-risk strategy, focusing on specific companies or small groups of stocks, anticipating their performance will hinge on the election outcome. These bets are tough to make, given how market prices can shift drastically once a winner is declared.
Singleton adds, “Many managers will try to observe how the landscape evolves post-election and invest subsequently.”
Right now, there’s significant risk for funds looking to aggressively divest from major tech stocks that have been driving market gains over the past year, such as Nvidia, Meta Platforms, Amazon, and Alphabet.
While such a rotation may make sense and ultimately stabilize these stocks’ prices, if they continue to rise unexpectedly, a “flat contraction” could emerge. In this scenario, more investors might buy as the anticipated slowdown fails to materialize, creating a self-fulfilling cycle of rising stock prices.
Ultimately, November’s trading activities will determine whether divesting from winning stocks was the right choice. Hedge funds have the potential to reap returns, especially since they have lagged behind the S&P 500 for the past four years. Data from PivotalPath reveals that U.S. fundamental long-short hedge funds gained only 7.4% in the first half of the year, compared to the S&P 500’s 14% increase.
One area where hedge funds are already seeing gains is in the demand for their services. As elections draw closer and stock prices reach record levels, investors are becoming more cautious and increasingly seeking guidance on how to position themselves.
Don Steinbrugge, president of global hedge fund consulting and marketing firm Agecroft Partners, notes, “Investors are concerned about equity market valuations and want coverage. If they weren’t worried, they’d simply buy an index fund and pay minimal fees.”
Source: https://www.perfil.com/noticias/bloomberg/bc-el-plan-electoral-de-los-hedge-funds-vender-la-calma-comprar-el-caos.phtml
