Traders on Wall Street have shown a surge of excitement with the victory of Donald Trump in the elections. However, data from HFR reveals that hedge funds have seen more prominent alpha generation when a Democrat is in the Presidential office as compared to a Republican. The data takes into account trends dating back to 1991.
When pitted against the S&P 500, the hedge fund industry has consistently underperformed, irrespective of the political affiliation of the President. However, the underperformance gap during Democratic tenures was about 183 basis points, with hedge funds providing average annualized returns of 10.16% as compared to the 11.99% returns from the S&P 500. On the other hand, the underperformance gap during Republican administrations was significantly higher at 331 basis points.
In contrast to the S&P 500, when juxtaposed with a bond index, hedge funds under both parties demonstrated superior performance. They showed greater alpha during periods when a Democrat was in the White House. Interestingly, the total net asset flows were higher under Republican administrations (approximately $450 billion) than Democratic ones (around $400 billion), despite the fact that Democrats held the office for six more years since 1991 than Republicans.
When it comes to financial contributions in elections, hedge fund participants demonstrated a noticeable bias towards one party. A recent report by Open Secrets revealed that during the 2024 election cycle, individuals from the industry donated $31 million to Democratic candidates, while a significantly lower amount — $16 million — was given to Republican candidates.
However, it’s important to note that hedge fund returns are more closely linked to their positioning in relation to various asset-class performances than specific policies implemented by the administration. Therefore, it remains challenging to predict what the next four years have in store for the industry.
The 14th annual Delivering Alpha event held on Wednesday should provide some insight into how money managers might be revamping their portfolios. This information could prove valuable to individuals interested in investing, although that is not the primary focus of this discussion.