Hedge Funds Navigate Asymmetric Trading Ahead of Election

By Carolina Mandl and Davide Barbuscia

NEW YORK (Reuters) – Hedge funds and other investors are searching for trades that profit from a win by Republican presidential candidate Donald Trump, while also offering limited downside if Vice President Kamala Harris prevails.

As the tightly contested race nears, some are looking for "asymmetric trades" involving bitcoin or the yuan, which could yield significant profits if Trump wins but minimize losses if they are wrong.

"Trading the election is difficult given how tight it is," said Edoardo Rulli, head of UBS Hedge Fund Solutions.

Some betting websites lean towards Trump, generating momentum for related trades. However, others predict these trades may lose traction or reverse should Harris win.

Trades that may result in higher gains than losses in either outcome have been suggested, such as a long position in bitcoin. David Kalk, founder of hedge fund Reflexive Capital, noted that if Trump wins, the bitcoin upside could be two to three times the investment at risk. "The negative price response we expect in case of a Harris victory just seems much smaller than the upside of a Trump win," he stated.

Patrick McMahon, founder of macro hedge fund MKP Capital Management, suggested shorting the yuan against the dollar as an asymmetric trade, considering potential losses the Chinese currency might face with imposed tariffs.

Some have chosen neutral strategies, such as pairing short positions on stocks with long ones to reduce directional exposure, according to Robert Christian, chief investment officer at K2 Advisors. Gains from one trade could counterbalance losses in another.

Mario Unali, head of investment advisory at Kairos Partners, managing a fund of hedge funds, remarked that trades have pivoted to favor Trump due to a Harris win representing the status quo, resulting in more limited losses.

The hedge fund industry posted an 8.3% gain in the first nine months of the year according to research firm PivotalPath, underperforming the S&P 500's 20% gain, prompting hedge funds to adopt more cautious strategies as the election approaches.

Jon Caplis, CEO of PivotalPath, anticipates some selling ahead of the election. "They could bank those returns, then wait for weeks or months for clarity," he said.

TRUMP TRADE

Large wagers on betting markets have led social media users to question whether these bets are influencing the markets or if prediction markets are simply better indicators of the race.

Trump-related trades include a selloff in Treasuries, the yuan, and a rise in shares of Trump Media & Technology Group.

With the candidates neck and neck days before the election, some investors worry that trades placed on expectations of a Trump victory may be overinflated.

As per an average of national polls from aggregator 538 on Thursday, Kamala Harris led Trump 48.1% to 46.7%, a gap 1.3 percentage points smaller than on October 1.

"I think this short-term move in Treasuries is probably overdone," commented John Luke Tyner, head of fixed income and portfolio manager at Aptus Capital Advisors.

"If Harris wins, you might see a snap back lower in long-term yields, but we will see it either way," he added.

Citi strategists mentioned they have exited certain Trump trades, including one benefiting from rising five-year inflation expectations.

"We have been taking profits as we believe the risk-reward is no longer compelling for some trades, as prices and positioning may have moved beyond what polls would justify," they remarked in a note on Tuesday.

A Republican sweep could intensify the bond selloff due to anticipated higher deficit spending, but there’s also a "meaningful risk of a sharp reversal in a Harris victory," they noted.