How could the U.S. election impact hedge fund returns?

story_images_ US flagAs the U.S. presidential race heats up south of the border, plan sponsors looking to make new hedge fund allocations might want to consider a new factor in their evaluation models: political ideology. A team of researchers from Berkeley and Harvard, Marian Moszoro and Michael Bykhovsky, have observed differences’ in hedge funds’ performance depending on the political preferences of the managers. While ideology doesn’t always drive performance, it’s been particularly influential post-2008, as intense partisan discussion about central bank policy dominated the political arena.

In “Political Cognitive Biases Effects on Fund Managers’ Performance” the authors document higher returns for equity hedge funds managed by Democrats for 10 subsequent months (December 2008 to September 2009).

They conjecture that three factors – the financial crisis, the election of Barack Obama, and a politically polarized interpretation of central bank policy post-crisis — affected hedge fund managers’ perceptions and decisions. That’s opposed to other periods in history where central bank policy was not a political issue – during those times, there was no statistically significant difference between the performance of managers based on political beliefs.

The implications could be significant the authors point out: “Back-of-the-envelope calculations suggest that, given the $380 billion dollars in equity hedge funds’ assets under management in 2009, the estimated 72 basis points difference in monthly performance between Democratic and Republican managers accrued $13.7 billion in relative losses for investors in funds managed by the later.

You can download the full paper here.