Hedge Funds' Risk Trends Higher Ahead of US Election

As the US presidential election approaches, hedge funds are positioning themselves for potential market volatility and uncertainty. According to data from Goldman Sachs, hedge funds have increased equity leverage by 20.6% year-to-date, indicating a higher risk appetite ahead of the election. This trend contrasts with previous election cycles, where leverage was trimmed or increased at a slower pace.

The strong performance of stocks, particularly in tech, and optimism about the US economy are driving this increased risk appetite. The benchmark S&P 500 is up over 20% year-to-date, reflecting investor confidence in the market. However, the benchmark S&P 500 Volatility Index (VIX) has also surged, reflecting investors' fear and uncertainty about the election's outcome.

Macro and long/short hedge funds have been the main strategies that added more equities to their books in October, according to Barclays. This increased risk appetite comes as election uncertainty surges, with the US presidential race remaining fluid and uncertain. The Democratic Party has swung quickly behind Vice President Kamala Harris as the party's nominee for the White House, following the withdrawal of US President Biden. Early polls showed Harris narrowing the lead enjoyed by former President Trump, but a "red sweep" is still the likeliest electoral outcome.

Investors should remain cautious and consider hedging strategies to manage potential volatility, as electoral shifts or upsets have historically produced market volatility rather than large and sustained drawdowns. The Swiss franc is a more conservative approach amid political uncertainty in the United States and Europe. Meanwhile, we do not believe the Swiss National Bank will cut rates much further. Gold can also be an effective hedge against concerns over geopolitical polarization, the US fiscal deficit, or a weaker US dollar. Structured strategies can enable investors to retain exposure to further potential gains in stocks, while reducing sensitivity to a correction.


In conclusion, hedge funds are positioning themselves for potential market volatility and uncertainty ahead of the US election. The increased risk appetite, driven by strong stock performance and economic optimism, is reflected in the higher equity leverage. However, investors should remain cautious and consider hedging strategies to manage potential volatility. The market's ability to rise regardless of the controlling party should be considered when making investment decisions.