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- Markets are being driven by politics and hedge funds are already beginning to assess the risk that US President Donald Trump may face impeachment in 2019.
- It's not the only risk on their radar, of course, and nor is it the most likely. But investors are talking about it as a possibility.
- At least three Wall Street hedge funds are trying to assess how an impeachment might affect the markets.
Investors have a lot to worry about in 2019 — there's the trade war with China, Federal Reserve policy, and oil prices to name a few.
Recently, a new worry has cropped up: a possible Trump impeachment.
At least three Wall Street hedge funds and asset managers have started talking about the possibility of the impeachment of US President Donald Trump as a potential market catalyst in 2019, according to people familiar with their thinking.
It's an unwelcome development for hedge fund managers, who are finding it difficult to adjust their strategies to fit the increasingly uncertain political reality thanks to a soon-to-be Democrat-controlled House of Representatives. They can handle normal macro factors like central bank activity and trade tensions, but they view impeachment as a wild card — and it's thrown a wrench into their best-laid plans.
"That's something you really can't model for," said Larry Newhook, the CEO of Alpha Innovations. The firm runs a managed account platform for institutions to access smaller strategies and funds.
It's a relatively new market catalyst, coming after the midterms which saw Democrats win a majority in the House of Representatives and ever-present turmoil in the administration. In betting markets, the odds that Trump will be booted from office next year are shortening. After the midterms that saw Democrats flip the House and pick up dozens of seats, oddsmaker Bovada increased the likelihood of an impeachement, with a $100 bet on a Trump impeachment only paying out $125 compared to a $160 payout before November. Currently, the oddsmaker has a $100 impeachment bet paying out $150.
It's now also enough of a possibility to land on the radar of big investors.
"Internally, we're talking about this because it's interesting, but if it gets more significant we will talk about it more," said one London-based asset manager at a Wall Street firm. "I'm not sure it's a market positive, but it may not be a market negative. And it will take a long time."
Markets can react sharply to big geopolitical and global economic events, leading to big paydays for so-called "macro" investing strategies. A Trump impeachment would be behind other, more pressing macro risks next year, the asset manager said, such as, in order of magnitude: Fed policy, the US-China trade war, the "leveraged loan" boom, eurozone drama, emerging market turmoil and volatile oil prices. (The person added that Brexit is much higher on that list for UK-focused investors).
Newhook said that even comparing it to Bill Clinton's impeachment in 1998 wouldn't do much good because the market has changed so much in the years since.
Correctly gauging price moves from geopolitical events can be incredibly profitable. Big macro funds like Jeffrey Talpins' Element Capital have posted stellar returns in a year when the average hedge fund through the end of November has declined 2%.
But the last quarter of 2018 has been brutal for investors of all stripes — the average macro fund, according to data from Hedge Fund Research, lost 4.1% through November. Even one of the world's best macro traders, George Soros, is reportedly pulling back on the strategy. Soros Fund Management has cut its allocation to macro investments to $500 million compared to $3 billion last year.
"All you can do is say 'Hey, do I want to be aggressive with my risk-taking or not?'" said Newhook, who was formerly the head of due diligence for hedge-fund giant Steve Cohen. "The one thing you don't want to be doing if you think impeachment is possible is be short volatility. The bottom line is that this is just another source of volatility."
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