Hedge fund managers said they will watch upcoming negotiations and personnel appointments in Washington, D.C. for clues to how to position their portfolios after Barack Obama won a second term as U.S. president this week. Resolving the so-called fiscal cliff -- tax hikes and federal spending cuts that are scheduled to take effect in early January, barring an agreement between Congress and the White House -- is the most crucial issue facing markets, managers said. “The fiscal cliff is the mother of all events,” said Scott Warner, director and sector specialist for long/short equity strategies at Irvine, California-based Pacific Alternative Asset Management Co. Failing to resolve the fiscal cliff could result in a “2 percent to 3 percent drag” on U.S. GDP, meaning a drop of between 2 and 3 percentage points, Warner said in a telephone interview. Resolution will hinge in part on the outcome of Congressional leadership elections next week, Jason Mitchell, co-portfolio manager of GLG Partners LP’s Global Equity Fund. If Eric Cantor becomes Speaker of the House, “he will be very tough for Obama to negotiate with,” Mitchell said in a telephone interview from Boston.
Current Speaker of the House John Boehner “at least tries to work with” the White House, he said. Also crucial will be who is named as Treasury Secretary if Timothy Geithner departs as expected, Mitchell said. Among the leading contenders are Erskine Bowles, co-chair of the Simpson-Bowles Commission and a White House Chief of Staff under President Clinton, and the current White House chief of staff, Jack Lew. The Federal Reserve Bank will “likely play a bigger role” under President Obama than it would have had Mitt Romney won, Stephen Jen, partner at London-based global macro hedge fund SLJ Macro Partners, said in an email. “This means that financial market distortions are likely to be higher under Obama, and the risks of financial market volatility higher.” Tuesday’s outcomes “increased the probability that we will be in a ‘rates lower for longer’ environment,” Anthony Lawler, a London-based portfolio manager on GAM’s multi-manager team, said in an email.
Addressing the fiscal cliff is likely to be “a long drawn-out process,” said George Papamarkakis, managing partner and chief investment officer at North Asset Management, a London-based global macro fund. “It is very unlikely we will see any movement in this Congress, so we are expecting any developments to take place next year, which increases the likelihood of the markets trading down, as they can’t bear the uncertainty,” Papamarkakis said in an email. North Asset Management is unlikely to add risk while the fiscal cliff looms, Papamarkakis said in an email. “We are largely sidelined in regards to outright directional risk and won’t be looking to add until we have greater visibility.” Long/short equity managers have also been reducing risk in their portfolios, PAAMCO’s Warner said. “We have seen modest reduction in gross exposure across the board among our long/short managers,” he said. GAM may make some tweaks to its portfolio, Lawler said. “On the margin, we are likely to add to trades benefiting from yield, so for example in credit and currencies,” he said. “We are also likely to reduce our shorter-term long volatility exposure because we expect policy to remain solidly supportive for the coming quarters.”
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Current Speaker of the House John Boehner “at least tries to work with” the White House, he said. Also crucial will be who is named as Treasury Secretary if Timothy Geithner departs as expected, Mitchell said. Among the leading contenders are Erskine Bowles, co-chair of the Simpson-Bowles Commission and a White House Chief of Staff under President Clinton, and the current White House chief of staff, Jack Lew. The Federal Reserve Bank will “likely play a bigger role” under President Obama than it would have had Mitt Romney won, Stephen Jen, partner at London-based global macro hedge fund SLJ Macro Partners, said in an email. “This means that financial market distortions are likely to be higher under Obama, and the risks of financial market volatility higher.” Tuesday’s outcomes “increased the probability that we will be in a ‘rates lower for longer’ environment,” Anthony Lawler, a London-based portfolio manager on GAM’s multi-manager team, said in an email.
Addressing the fiscal cliff is likely to be “a long drawn-out process,” said George Papamarkakis, managing partner and chief investment officer at North Asset Management, a London-based global macro fund. “It is very unlikely we will see any movement in this Congress, so we are expecting any developments to take place next year, which increases the likelihood of the markets trading down, as they can’t bear the uncertainty,” Papamarkakis said in an email. North Asset Management is unlikely to add risk while the fiscal cliff looms, Papamarkakis said in an email. “We are largely sidelined in regards to outright directional risk and won’t be looking to add until we have greater visibility.” Long/short equity managers have also been reducing risk in their portfolios, PAAMCO’s Warner said. “We have seen modest reduction in gross exposure across the board among our long/short managers,” he said. GAM may make some tweaks to its portfolio, Lawler said. “On the margin, we are likely to add to trades benefiting from yield, so for example in credit and currencies,” he said. “We are also likely to reduce our shorter-term long volatility exposure because we expect policy to remain solidly supportive for the coming quarters.”
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