Some large hedge funds and money managers, sensing a potential shift in momentum, are getting behind trades that could pay out if Donald Trump beats Kamala Harris in the presidential election.
While most polling still shows a tight race, that shift has rippled across markets in recent weeks, boosting assets seen as likely to benefit from a Republican victory. For instance, the private-prison operator GEO Group is up 21% in October, on pace for its best month since 2022, while the bitcoin miner Riot Platforms has risen 34%.
The well-known hedge-fund manager Dan Loeb reckons that a Trump victory has become more likely, he said this month. His $11 billion firm, Third Point, has added to positions that could benefit, by buying stocks and options, and shifted away from companies that won’t.
“We believe the proposed ‘America First’ policy’s tariffs will increase domestic manufacturing, infrastructure spending, and prices of certain materials and commodities,” he wrote in an investor letter. “We also believe that a reduction in regulation generally and especially in the activist antitrust stance of the Biden-Harris administration will unleash productivity and a wave of corporate activity.”
Mark Dowding, chief investment officer of RBC BlueBay Fixed Income at RBC BlueBay Asset Management, has stepped up trades tied to a Trump victory since the end of September. Dowding, whose group oversees $130 billion in assets, has concentrated on interest rates and currencies.
Dowding is betting the dollar will strengthen and the U.S. yield curve will steepen, meaning long-term rates will go up more than short-term ones. He is wagering that inflation breakevens—essentially, bond-market measures of price pressures—will widen.
All three bets reflect Dowding’s belief that Trump’s agenda will stoke inflation, owing largely to tariffs. Trump has pledged sweeping tariffs of 10% to 20% on imported goods, and 60%-plus levies on goods from China. Economists say cost increases are usually passed on to consumers.
Last week, Dowding flew from London to the U.S. to meet policymakers and lobbyists, and said he was “struck by the fact that Republicans are feeling more confident than I expected.”
“At the start of the week, I picked up that narrative, and I started thinking ‘This is much more skewed toward Trump than I realized,’” he said.
The willingness of some investors to trade the election marks a switch from just weeks ago, when many said the race was too close to call and their focus was instead on interest rates and earnings. Once Trump’s betting odds started improving, the election became more of a priority.
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“It’s absolutely fair to say that the election has become a lot bigger of a driver in markets,” said Themos Fiotakis, global head of foreign-exchange and emerging-markets macro strategy at Barclays. He ties recent declines in the Chinese yuan and Mexican peso to Trump’s momentum. Trump recently said he could impose 200% tariffs on vehicles from Mexico.
“The moves are big, and the implied moves” in the options market are big, Fiotakis said. Betting against the currencies, and on the dollar, “is no longer a cheap no-brainer like it was two or three weeks ago.”
With Election Day nearing, investors say they are on high alert for changes in the competitive dynamic. Many are thinking about possible surprises on or after Nov. 5, particularly if the results are challenged or there are vote-counting delays.
“We don’t have a crystal ball,” said Vineer Bhansali, founder of the California hedge-fund firm LongTail Alpha. “The approach for us is, what’s not priced into the market?” He said a similar stance paid off in 2016.
Bhansali recently bought bullish call options that would pay out if stocks rise. His gains in a Harris victory would be larger because markets currently consider her the underdog.
“The market has an expectation that, generally, a Trump win is good for the market and that a Kamala win would be bad for the market,” he said. “I think there is a possibility that if Kamala wins…markets could rally.”
Through options, he could also benefit if stocks turn choppy after Election Day—a wager Bhansali said he made in case the result is uncertain.
Still, some managers are playing it safe. Many hedge funds are likely hesitant to make big wagers that could jeopardize this year’s strong gains, said Jon Caplis, chief executive of PivotalPath. An index compiled by his research firm shows hedge funds are up 8.3% through September after fees.
“The incentive for any of them to make big bets on what still seems pretty uncertain, it just doesn’t behoove them or their investors,” Caplis said.
Zachary Kurz, founder of PinnBrook Capital, a New York-based hedge-fund firm that oversees $500 million in assets, said he expects to reduce some positions ahead of the vote. He pointed to how unpredictable the result—and the market reaction—might be.
“The Mexican election surprised people negatively, the Indian election surprised people negatively and the French election surprised people negatively,” Kurz said.
—Peter Rudegeair contributed to this article.
Write to Caitlin McCabe at caitlin.mccabe@wsj.com
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Appeared in the October 23, 2024, print edition as 'Wall Street Sets Bets on Election Outcome'.
