Hedge Funds Risk-On Despite Danger of Trump Presidency

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Hedge Funds Risk-On Despite Danger of Trump Presidency

Hedge Funds Risk-On Despite Danger of Trump Presidency

The Market and Political View from Adam Jepsen, Founder, Financial Spreads.

When you're trading it's often not about what the markets should do but what all the other market participants will do.

Hedge funds seem to be taking an interesting position ahead of the US election.

There is a useful guide to what the big speculators are doing, this comes in the form of the weekly Commitment of Traders (COT) reports from the US Commodity Futures Trading Commission (CFTC).

Amongst other things, the COT reports show how firms with significant positions (typically hedge funds) have increased or decreased their positions over the week. The reports also show whether the hedge funds are long or short of a market.

- - - Latest COT Report - - -

The latest COT report was released late on Friday 4 November and covers the week to 1 November 2016, it shows:

Market Long Position : Short Position Ratio
Dow Jones 2.6 : 1
S&P 500 4.1 : 1
Gold 3.9 : 1
Dollar Index 5.2 : 1

Looking at the week to 25 October 2016 the same markets were:

Market Long Position : Short Position Ratio
Dow Jones 3.0 : 1
S&P 500 2.4 : 1
Gold 3.2 : 1
Dollar Index 4.9 : 1

Interestingly, the latest report covers the period when the Hillary Clinton email saga was put back on the front pages, a period when Donald Trump has been in the ascendancy.

If Trump becomes President I'd expect many traders to be hitting the sell button like the buttons of a 1980s arcade game.

Quick 3-5% falls in the Dow Jones and S&P 500 are possible. Likewise, the US dollar could take a similar hit.

Many investors treat gold as a safe haven in times of uncertainty and a Republican win could bring a lot of uncertainty and increased market volatility. Therefore it makes sense that the hedge funds have been getting longer of gold.

However, rather than flattening their books or being a little more risk averse, the hedge funds have also increased the number of long positions on both the S&P 500 and the US dollar index.

The COT report shows that there are more than 4 long trades for every short of the S&P 500 and more than 5 longs for every short of the US dollar index.

The positions on the Dow Jones looks a little more cautious but they are still 2.6:1 long and little money has been taken off the table.

There are certainly some mixed messages.

Given how close the polls are and the distinct possibility of some strong short-term selling if the Republican wins, you have to wonder why the hedge funds appear to be so risk-on.

The most obvious answer seems to be that the hedge funds are taking a longer-term view.

They seem willing to ride out the possible short-term storm and think the markets will rise whoever wins.

- - - CFTC Commitments of Traders Report - - -

Data above is taken from the Short Format, Futures-Only Commitments of Traders report: www.cftc.gov/dea/newcot/deafut.txt

The raw data from the CFTC isn't that easy to read so Financial Spreads creates easier to read reports:

By Adam Jepsen, 7 November 2016

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