Hedge funds bet big on Trump’s second term

Hedge funds have positioned for Donald Trump‘s U.S. presidency with their highest levels of borrowing since 2010, while betting the dollar would continue to rise, according to bank research and industry data.

U.S. stock trading hedge funds kicked off the week with gross leverage levels in their highest range since 2010, a note from Morgan Stanley’s prime brokerage seen by Reuters showed. Gross leverage reflects how much a hedge fund has increased its market positioning.

European stock traders wagered that European equities would rise, especially in financial, tech and energy companies, said the note.

Lower taxes, deregulation and higher tariffs might create tailwinds for some U.S. stocks, but tariffs and added volatility would deter gains more widely, said an investment letter by James Hanbury and Jamie Grimston, portfolio managers of the two funds at Lancaster Investment Management in London overseeing roughly $1.4 billion in assets.

“This will be going on whilst the U.S. fiscal deficit is at greater than 6% with the economy currently at full employment,” said the letter.

Higher volatility and lower regulation “should be beneficial for Plus500 and IG Group where we have a smaller holding,” it added, referring to financial firms in which the hedge fund held long positions.

America first

Trump kicked off his White House tenure with several protectionist policies to hoist American economic interests over trade partners.

Going into the inauguration, hedge funds dumped emerging markets stocks outside of China in the largest net selling since October, said a separate note from Goldman Sachs on Friday.

Hedge funds’ China trades have fallen to five-year lows, said the note.

Hedge funds trading macroeconomic signals, including systematic trend followers, continue to bet on a strong dollar, a separate weekly note from JPMorgan said on Jan. 13.

Barclays said in a separate note that CTAs’ – commodity trading adviser funds that trade futures and other derivatives – long dollar bets are “stretched, especially versus the euro.”

“Looking at markets going forward…we are strong proponents of the Trump trade in currency markets, strongly long the dollar in the G10, especially against sterling and the euro,” said Russel Matthews, a senior portfolio manager in global macro at RBC BlueBay Asset Management, in London.

Russel said the investment manager was short the pound against the dollar “quite aggressively,” given how deeply the UK Labour Party’s policies have been “picked over and criticised.”

A short position implies an asset will weaken in value.

While RBC BlueBay has taken some if its trade off the table, the firm expects continuing dollar strength to push the euro to $1 or below.

“We know there will be punitive measures taken against Europe…we have yet to see what these will be, but this is coming,” said Matthews.

Some portfolio managers are looking at the impact a stronger greenback may have on businesses and countries with dollar debt.

“You may see a strengthening dollar that could lead to problems for many emerging market companies that have debt issued in dollar terms,” said Sina Toussi, chief investment officer at special situations hedge fund Two Seas Capital, with $1 billion in assets under management. He added that countries with high external debt in dollars could also struggle.

“We haven’t seen any real dislocations yet in the market, but we’re spending some time trying to anticipate where some of those dislocations can happen.”

—Nell Mackenzie, Reuters