Hedge funds in wait-and-see mode for 2025 with Trump coming

Hedge funds navigated through a volatile stock market to post strong returns in 2024. But they’re on edge heading into 2025 as uncertainty swirls around President-elect Donald Trump’s policies.

Wall Street’s smart money crowd successfully monetized gains on high-flying technology stocks this year and made timely bets around the US presidential election. That has helped the group post a gain of more than 14% in 2024, according to the PivotalPath US Equity Diversified Index, which tracks the performance of long-short portfolio managers investing in US stocks. That would be their best calendar-year return since 2020.

But starting next month the investing environment changes with Trump’s inauguration. January is typically a month when hedge funds increase exposure and add long and short positions. However, they’re in limbo now as they wait to see if — and when — the new president executes his more market-sensitive election promises, like sweeping tariffs on imported goods and mass deportations of undocumented workers.


“My suspicion is people will perhaps stay relatively conservative until at least Trump’s inauguration or until some of the first policy announcements,” said Adam Singleton, chief investment officer of the external alpha strategy at Man Group Plc in London.

As investments, hedge funds are as much about protection as returns. During Trump’s first term, they outperformed the market in just one year, 2018, when the S&P 500 Index lost 6.2% while hedge funds dropped just 3.4%. This time around, the thinking is their strategies could best manage disruptions if the new administration’s policies weigh on the economy or stock market.

“There’s so much uncertainty around what the policies are going to be, how much is bluster, how much is real and how quickly these things happen,” said Jonathan Caplis, chief executive officer of the hedge fund research firm PivotalPath.

In addition, there are structural risks in the market right now. Equity valuations are sky high, with the S&P 500 up 27% in 2024 and on pace for its best year since 2019, after soaring 24% in 2023. This would be only the fourth time ever that the equities benchmark has climbed more than 20% in consecutive years. In addition, economic data is showing that inflation may be more stubborn than expected, which could hamper the Federal Reserve’s projected interest rate cuts.

Less Tech
Already, hedge funds are positioning cautiously around Big Tech growth stocks, with their exposure to the so-called Magnificent Seven — Alphabet Inc., Apple Inc., Amazon.com Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc. — near the lowest since mid-2023, according to Goldman Sachs Group Inc.’s prime brokerage desk.

They had been loading up on those shares, which have been benefiting from investor mania surrounding artificial intelligence, since 2023, but they started selling in mid-year when an index tracking the stocks was up 50% for the year and about to reverse direction, losing almost 20% from July 10 to Aug. 7.

“Hedge funds made a smart tactical move by selling big tech right at the highs, which allowed them to have more dry powder to buy the dips,” said Frank Monkam, head of macro trading at Buffalo Bayou Commodities.

They also had success positioning for the US election, using the cash they made over the summer from reducing their equities exposure to pile into some sectors associated with the so-called Trump trade, like financials, industrials and energy. The Goldman Sachs Republican Policy Outperformers basket soared 13% in November but is down 5.8% in December, and fund managers saw the moves, trimming their exposure as the post-election euphoria died down, Monkam said.

From here, the question for hedge funds is how best to deploy 2024’s profits. A measure of gross leverage, or exposure to US stocks, is hovering near multi-year highs.

All told, it looks like a cautious stock-pickers’ market, which could be ideal for hedge funds once they get a coherent sense of where economic policy is headed.

“It’s likely going to be more wait-and-see as opposed to seasonal behavior when hedge funds are adding positions in January,” Caplis said. “It may be a few more months, or at least another month, just to let the new administration send some clear signals.”