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There is a wave of excitement on Wall Street over Donald Trump’s election victory, but hedge funds actually generate more alpha when the White House is occupied by a Democratic president than a Republican president, according to HFR, citing data going back to 1991.
Compared to the S&P 500, the sector underperformed regardless of who was president. But during Democratic administrations, the difference was about 183 basis points, with hedge funds delivering an average annualized return of 10.16%, compared to 11.99% versus the S&P 500. The underperformance difference during Republican administrations was 331 basis points. (1 basis point equals 0.01%.)
Compared to the bond index, HFR found that hedge funds performed better under both parties – with a stronger alpha when a Democrat was in the White House.
Total net wealth flows were higher under Republican administrations (about $450 billion) than under Democratic ones (about $400 billion), even though Democrats have held the highest office for six years longer than Republicans since 1991.
Surprisingly, the way participants donate to hedge funds during elections was slightly more biased towards one party. According to a recent report from Open Secrets, individuals in the industry donated $31 million to Democratic candidates during the 2024 election cycle, while nearly half of that amount – $16 million – went to Republican candidates.
The conclusion here, of course, is that hedge fund returns are much more correlated with positioning against the performance of different asset classes than with particular government policies. So it is difficult to make predictions about what the next four years will mean for the sector.
On Wednesday 14e annual Deliver Alpha eventwe should get a sense of how money managers can reconfigure their portfolios.