Written by Neil McKenzie, Carolina Mandel and Summer Chen
LONDON (Reuters) – Hedge funds braced for a Donald Trump presidency in the United States with the highest levels of borrowing since 2010, while betting that the dollar will continue to strengthen, according to bank research and industry data.
US equity hedge funds started the week with total leverage levels at their highest range since 2010, a note from… Morgan Stanley The major brokerage firm (NYSE:) seen by Reuters showed. Total leverage reflects the extent to which a hedge fund has increased its position in the market.
The memo stated that European stock traders bet that European stocks would rise, especially in financial, technology and energy companies.
Lower taxes, deregulation and higher tariffs could create tailwinds for some U.S. stocks, but tariffs and additional volatility would dampen gains more broadly, said an investment letter written by James Hanbury and Jamie Grimston, portfolio managers of the two funds at Lancaster Investment Management in London. About $1.4 billion in assets.
“This will continue while the US fiscal deficit is more than 6% and the economy is currently at full employment,” the letter said.
High volatility and low regulation “should be beneficial for Plus500 (LON:) and IG Group where we have smaller ownership,” she added, referring to financial companies in which the hedge fund holds long positions.
America first
Trump began his term in the White House with several protectionist policies to elevate American economic interests over trading partners.
As the inauguration approached, hedge funds sold emerging market stocks outside China in the biggest net sell-off since October, a separate note from Goldman Sachs said on Friday.
The memo stated that hedge fund trading in China fell to its lowest levels in five years.
A separate weekly note from JPMorgan on January 13 said that hedge funds trading macroeconomic signals, including systematic trend following, continue to bet on a strong dollar.
Barclays (LON:) said in a separate note that CTAs — commodity trading advisor funds that trade futures and other derivatives — long bets on the dollar were “extended, especially against the euro.”
“Looking to the markets going forward… we are strong supporters of Trump trading in the currency markets, and we are strong long positions for the dollar in the G10, especially against the pound and the euro,” said Russell Matthews, senior portfolio manager in global macro at RBC. . BlueBay Asset Management, in London.
Russell said the investment manager was selling sterling against the dollar “very aggressively”, given how deeply he had “been critical of UK Labor policies”.
A short position indicates that the value of the asset will weaken.
While RBC BlueBay has taken some of its trading off the table, the company expects continued dollar strength to push the euro to $1 or below.
“We know that punitive measures will be taken against Europe,” Matthews said. “We have not yet seen what those measures will be, but that is coming.”
Some portfolio managers are looking at the impact that a stronger dollar could have on companies and countries with dollar debt.
“You may see a rise in the value of the dollar that could spell trouble for many emerging market companies that have issued dollar debt,” said Sina (BitStamp:) Tusi, chief investment officer at special situations hedge fund Two Seas Capital, with $1 billion in capitalization. Assets under management. He added that countries with high dollar external debt could also suffer.
“We haven't seen any real disruptions yet in the market, but we're spending some time trying to anticipate where some of that disruption could occur.”
Hedge funds that trade China expect near-term volatility, especially after Trump said Tuesday that his administration is discussing imposing punitive 10% tariffs on Chinese imports.
Stanley Tao, IT director at Golden Nest Capital, a Hong Kong-based hedge fund managing $250 million, remains cautious in the first half of the year, given that it takes time to see what action Trump will take and how China will respond.
“If the Trump administration is tough on China, China may introduce unconventional stimulus measures, which could actually benefit the stock market,” Tao said.
He favors stocks driven by domestic demand and exporters focused on non-US countries, while he said he would stay away from the auto sector, companies with overcapacity problems and manufacturers directly exposed to tariff risks.
