Hedge funds are in wait-and-see mode for Trump come 2025

Hedge funds navigate volatile stock market to deliver strong returns in 2024 But they are moving toward 2025 as uncertainty surrounds President-elect Donald Trump’s policies.

Wall Street’s smart money crowd has successfully monetized high-flying technology stocks this year and made timely bets around the US presidential election. That helped the group rise more than 14% in 2024, according to the PivotalPath US Equity Diversified Index, which tracks the performance of long-short portfolio managers investing in US stocks. It would be his best calendar-year return since 2020.

But with Trump’s inauguration next month, the investment climate changes. January is typically a month when hedge funds increase exposure and add long and short positions. However, they are now in limbo as they wait to see if — and when — the new president implements his more market-sensitive election promises, such as steep tariffs on imported goods and mass deportations of undocumented workers.

“My suspicion is that people will probably be relatively conservative, at least until Trump’s inauguration or some of the first policy announcements,” said Adam Singleton, chief investment officer of External Alpha Strategy at Man Group Plc in London.

As an investment, hedge funds are as much about protection as return. During Trump’s first term, they outperformed the market in just one year, 2018, when the S&P 500 index fell 6.2% while hedge funds fell just 3.4%. This time, the idea is that if the new administration’s policies emphasize the economy or the stock market, their strategy can best manage disruptions.

“There’s a lot of uncertainty around what the policies will be, how much bluster, how real and how quickly these things happen,” said Jonathan Caplis, chief executive officer of hedge fund research firm PivotalPath.

Additionally, there are structural risks in the market right now. After gaining 24% in 2023, equity valuations are skyrocketing, with the S&P 500 up 27% in 2024 and its best year since 2019. This will be only the fourth time the equity benchmark has risen more than 20% in consecutive years. In addition, economic data indicates that inflation may be more stubborn than expected, which could lower the Federal Reserve’s target interest rate.

Low tech
Already, hedge funds are positioning cautiously around big tech growth stocks, including the so-called Magnificent Seven — Alphabet Inc., Apple Inc., Amazon.com Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc. – is at its lowest level since mid-2023, according to Goldman Sachs Group Inc.’s prime brokerage desk.

They had been loading up on stocks benefiting from the investor frenzy surrounding artificial intelligence since 2023, but they started selling mid-year when an index tracking stocks was up 50% for the year and nearly reversed its direction, 10 Lost about 20% from July to August 7.

“Hedge funds made a smart strategic move by selling big tech at highs, which gave them more dry powder to buy dips,” said Frank Moncam, head of macro trading at Buffalo Bayou Commodities.

They were also positioned for success in the run-up to the US election, using the cash they made over the summer to reduce their equity exposure in some sectors associated with so-called Trump trades, such as financials, industrials and energy. The Goldman Sachs Republican Policy Outperformers basket rose 13% in November but is down 5.8% in December, and fund managers saw the move, reducing their exposure as post-election sentiment waned, Moncum said.

From here, the question for hedge funds is how best to deploy the 2024 gains. A measure of gross leverage, or exposure to US stocks, is near multi-year highs.

All told, it looks like a cautious stock-pickers’ market, which could be ideal for hedge funds, once they have a coherent sense of where economic policy is headed.

“When hedge funds are adding positions in January it’s likely to be more wait-and-see versus seasonal behavior,” Caplis said. “It may be a few more months, or at least another month, to allow the new administration to send some clear signals.”