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Hedge fund positioning ahead of U.S. Elections

If past elections provide any guidance, prospects for a Trump reelection look slim. History suggests that a second term reelection almost always requires strong growth. In most past election campaigns, polls did not materially shift after October.

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So far, polls between the two candidates continue to diverge with no example since 1980 of a candidate closing such a huge poll gap so close to the election.

Senate elections might be even more pivotal in defining future U.S. policies. The ambitious Democrat agenda on stimulus, taxes, and wages largely depends on a majority in Congress. A third of the 100 Senate seats will be contested, 10 of which are likely to be decisive. Republicans have a tight 53-47 majority, requiring a net 3 gain for Democrats to take control if Mr. Biden is elected (including the Vice President’s tie-break vote, giving him the final say in 50/50 motions).

A Biden win still looks likely without false steps or “political” surprises. A clear-cut win would also reduce chances for extended legal disputes. Yet, we find that a “Blue Wave” is not as likely.

Online bets, consistent with two third odds of a “Blue Wave”, differ from polls that are tighter, and from trends in assets most sensitive to the outcome that are also more cautious. For now, markets are struggling to assess the implications of a “Blue Wave”, weighing impacts of higher taxes and wages vs. larger stimulus and less policy uncertainty, including trade policies. The outcome that is currently little priced by markets is a presidential vote that would be tight enough to result in heated legal disputes and market volatility.

Elevated uncertainty regarding the majority in Congress makes it speculative to position on U.S. elections. Hegde funds generally raised their exposures on signs that the September correction was ending. They are now shaving off some of their risks and neutralizing their most directional calls. Overall, feedbacks from U.S. hedge fund managers suggest that their positioning is not solely focused on the U.S. elections outcomes. Broader macro trends, including ample liquidity, likelihood of additional fiscal stimulus (be it delayed), and the ongoing recovery are greater drivers of their exposures.

Global Macro strategies are still seeing medium-term dollar weakness (with short-term support), are long U.S. breakeven and gold, and favor tactical calls on U.S. treasuries (currently short). EM-focused strategies remain long credit, especially on quasi-sovereign and are now long bonds – partially hedged with selective EM FX positions. U.S. L/S Equity strategies are cautiously positioning on a Democrat win, with a partial rotation out of some of their tech stocks towards the prime beneficiaries of a recovery and exposures to Asia Pacific. In Europe, L/S Equity managers have not materially changed their exposures. They are also cautiously increasing exposures to value stocks at the expense of tech positions. Their main concern regarding U.S. elections, which may have less direct sector impact, is getting the market timing right.

Lyxor Research , October 27

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