Stockholm (HedgeNordic) – A week out from the 2016 election, U.S. hedge fund managers are still faced with a set of conflicting imperatives for how they hedge their bets.
“You have one person with questionable judgment and the other person may be demented, narcissistic and a scumbag,” says Appaloosa Management’s David Tepper, the CEO of the $19 billion hedge fund based in Miami. “Not saying which one is which, you can make your decision on that. So it’s a very difficult choice.”
The distaste with which the choice in the 2016 U.S. Presidential Election is widely regarded, as opposed to more traditional measures of policy agreement or investment prerogatives, may be one pointer towards understanding the behaviour of hedge fund executives in this election. However, partisan affiliation remains, irrespective of market movement projections and differing assessments of whether financial markets are reactive or proactive with regards to political events.
For example, the $30 billion investment management firm Renaissance Technologies, as CNBC reports, may be the closest to exemplifying, in hedge fund-speak, “market neutrality”: Renaissance’s co-chief executive Robert Mercer has personally donated $19 million to Donald Trump and other (contradiction notwithstanding) conservative causes in this election cycle, while the company’s chairman James Simons together with director Henry Laufer have donated $14 million to Hillary Clinton and assorted liberal causes. The firm is not alone in its seeming bipartisanship: other hedge funds, such as Paloma & Partners and Paul Singer’s Elliott Management, per the report, exemplify similar trends. At a firm like Renaissance, where computers do the actual trading, personal opinions are not in conflict with the nature of the work.
Where hedge fund executives have dominated the pool of donors throughout the election cycle (including the primaries), hedge funds are also playing a larger role than usual in the U.S. Presidential election more broadly. As of late October, hedge funds or their employees have contributed as much as $173 million to candidates in the aggregate election cycle so far – more than triple the amount donated in 2012 and eight times that donated in 2008, according to the non-partisan Center for Responsive Politics.
Assessments of contributions to the two major party nominees differ, but the consensus appears is that Mrs Clinton has received the majority, estimated at $45.2 million in late October, by comparison with a paltry $239,250 for Mr Trump in the same CFRP study. Such figures, however, need to be qualified: Mrs Clinton’s intake, at least, includes contributions to Super PAC’s (Political Action Committees), while Mr Trump’s fundraising figures have largely been as opaque as his own tax returns, with a safe bet being a healthier influx following the start of fundraising for his campaign in August than reported. In addition, his campaign added several noted fundraisers and operatives who are themselves hedge fund executives. Nevertheless, as Fortune Magazine reports, Mrs Clinton appears to be the clear industry favourite – not least because donations from more conservative hedge fund executives appear to be to down ballot Congressional races and other PAC’s, rather than to Mr Trump himself.
It may be tempting to relate the lukewarm conservative support in the industry for Mr Trump to his tough talk on hedge funds, but the reality is more layered. True to his populist style, Mr Trump has claimed that the “hedge fund guys are getting away with murder.” His tax plan calls for abolishing the tax treatment that applies to “carried interest,” the share of investment funds’ profits paid to managers, which is treated as capital-gains income, rendering it eligible for a tax rate as low as 23.8%, by comparison to the top individual income tax rate at 39.6%. However, as Bloomberg notes, his plan also calls for a new 15% tax rate on individuals who receive income from business partnerships, a category including most hedge fund, private equity and VC managers. The effect of this would be for many managers’ tax rates to go from 23.8% to 15%. At a recent presidential debate, one of the rare points of agreement between Mr Trump and Mrs Clinton was on the elimination of the carried interest tax loophole, but as with so many of Mr Trump’s proposals, this seem to promise one thing while meaning something quite different in empirical reality. Mrs Clinton’s plan, by contrast, also proposes increased regulation over financial firms, including banks, hedge funds and others, tackling the “shadow banking system,” which includes hedge funds, and imposing additional taxes on high-frequency trading, alongside the abolition of carried-interest.
So why is support greater for Mrs Clinton than for Mr Trump in the industry, expressed in measurable donations so far at least, considering potential advantages of a Trump presidency for the U.S. hedge fund industry? One answer might be that some managers, irrespective of political persuasion, themselves see little need for further tax benefits. Another might be concern for market reactions to a Trump presidency, and still another might be concern for the stability of the financial system and the global economy through the prism of the wider policy proposals espoused by the candidates, where there is an emerging consensus that Mrs Clinton’s suggest more stability for the United States and the geopolitical system, as a whole.
There remains, of course, a diversity of opinion on the possibility of a Trump presidency among hedge fund managers, be it in terms of risk assessment or personal preference. Either way, they’re about to find out the results of how they’ve hedged their bets.
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