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There's a lot of excitement on Wall Street about Donald Trump's victory, but hedge funds actually generate more alpha when the White House is occupied by a Democratic president than a Republican one, according to HFR, which collects data going back to 1991.
Compared to the S&P 500, the industry underperformed regardless of who was president. But under Democratic administrations, the gap was about 183 basis points, with hedge funds earning an average annual return of 10.16%, compared to 11.99% for the S&P 500. Under Republican administrations, the underperformance gap was 331 basis points. (1 basis point equals 0.01%.)
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When compared to a bond index, HFR found that hedge funds from both parties outperformed – with a stronger alpha when a Democrat was in the White House.
Total net wealth flows have been higher under Republican administrations (around $450 billion) than under Democratic ones (around $400 billion), even though Democrats have held the highest office for six more years than Republicans since 1991.
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Surprisingly, the way hedge fund participants donated in 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 in the 2024 election cycle, while nearly half of that amount – $16 million – went to Republican candidates.
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The takeaway here, of course, is that hedge fund returns are far more correlated to positioning relative to the performance of various asset classes than to specific government policies. Therefore, it is difficult to make predictions about what the next four years will mean for the industry.
At the 14th annual Delivering Alpha event on Wednesday, we should get a glimpse of how asset managers may be reconfiguring their portfolios.