Hedge funds are adjusting their positions for the Trump presidency by borrowing at the highest levels since 2010 and banking on the continued rise of the dollar, as per research from banks and industry data. U.S. stock trading hedge funds have boosted their gross leverage to levels not seen since 2010, as noted in a report from Morgan Stanley's prime brokerage. European stock traders are optimistic about the rise of European equities, particularly in financial, tech, and energy sectors, according to the same report.
Lancaster Investment Management managers James Hanbury and Jamie Grimston, overseeing around $1.4 billion in assets, believe that while trends like lower taxes and deregulation may benefit some U.S. stocks, tariffs and increased volatility could impede more widespread gains. They emphasize the impact of the current U.S. fiscal deficit, which exceeds 6%, despite the economy being at full employment.
The potential benefits of higher volatility and diminished regulation are highlighted in the investment letter, particularly in relation to Plus500 and IG Group, in which the hedge fund has small holdings.
In a separate event, hedge funds have been reducing their exposure to emerging market stocks outside of China, with China-related trades reaching a five-year low. Meanwhile, hedge funds tracking macroeconomic signals are maintaining their bets on a strong dollar, as reported in recent notes from JPMorgan and Barclays.
Russel Matthews, a senior portfolio manager at RBC BlueBay Asset Management in London, expressed confidence in the "Trump trade" within currency markets, significantly favoring the dollar against the G10 currencies, especially sterling and the euro. Despite having trimmed some positions, Matthews foresees sustained dollar strength potentially pushing the euro below $1.
Sina Toussi, Chief Investment Officer at hedge fund Two Seas Capital, with assets under management of $1 billion, raises concerns about the impact of a stronger dollar on businesses and countries with dollar-denominated debt. He anticipates potential challenges for emerging market firms and countries heavily reliant on dollar-based debt.