Trump's Trade Policy Changes: How Do Hedge Funds Prepare?

The impact of the age of ‘Trump 2.0’ on hedge funds remains as uncertain today as it did upon the day of the President’s resounding election victory on November 5, 2024. Could key trade implications lead to a widespread shift in Wall Street sentiment? 

Hedge funds have been quick to prepare for Trump’s second term in the White House, and while many leading institutional investors have cast an optimistic tone on Wall Street, a fundamental shift in strategy appears to be taking shape. 

As Trump takes office once again, hedge funds have ramped up their borrowing to its highest levels since 2010, while also betting on the rising value of the dollar. 

However, leading institutions have also shown signs of quickly adapting their strategies, and in the weeks following the US election, hedge funds became net sellers of equities linked to the President. 

Following inflows into stocks thought to be positively affected by the arrival of the president in the financial, industrial, and defense sectors, data showed a trend reversal soon after. Instead, hedge funds became net sellers of US equities. 

The reason for this was attributed to uncertainty over the impact of anticipated deregulation measures, while hospitality stocks and other discretionary industries shed value over concerns surrounding consumer spending power. Healthcare also saw outflows due to possible policy shifts from Trump. 

Although some analysts claim that the outflows were a result of profit-taking following a significant post-election rally, it’s clear that hedge funds have been quick to prepare for four years in a shifting financial landscape. 

Tariff Uncertainty

For the years ahead, the matter of Trump’s proposed tariffs will weigh heavily on hedge fund strategies. 

Although Trump resisted the temptation of imposing the strong tariffs promised on day one of his Presidency, 25% rates for Canada and Mexico have been earmarked for February 1, 2025, while the President granted a short-term reprieve for the 10% additional tariff proposed for China depending on whether a deal for TikTok can be reached. 

Markets had been hoping that Trump’s tariff threats were no more than a bargaining chip for international trade, and the lingering uncertainty over what trade may look like under a Trump Presidency is likely to form the cornerstone of institutional strategies moving forward. 

In determining the possible impact of trade tariffs on the US economy, Morgan Stanley pointed to a 2019 study by the International Monetary Fund that suggested a 5% increase in tariffs during economic expansion could decrease productivity by around 1% over five years. 

However, the investment bank also noted that tariffs have been found to increase productivity when the economy is contracting. 

Given that tariffs are generally inflationary tools, their impact on productivity could be weaker as a whole. 

As for the stock market, the impact of tariffs can be similarly challenging, with tariffs on imports during Trump’s first term in the White House causing affected stocks to underperform the S&P 500 in both the solar and steel industries. 

Adapting to Trump 2.0

Given the level of control the Republican party has over Congress, a federal body with significant constitutional authority over trade, Trump’s second term could be far less constrained when it comes to trade policy changes. 

Trump’s sweeping prospective trade actions that would require congressional input like the renegotiation of trade agreements, the creation of new authorities to impose tariffs on foreign countries, and the reauthorization of trade preference programs, are highly unlikely to encounter the scrutiny of Congress. 

The Republican sweep in the US election in November has meant that hedge funds need to accept that Trump will have the power to implement many of the more radical aspects of his agenda. As a result, we can expect many fresh risks and opportunities for investors. 

Given that Trump has inherited an economy that’s performing relatively well, factors like taxes, deregulation, antitrust, trade and tariffs, and inflation will all be significant in shaping hedge fund strategies in the coming years. 

Because we’re talking about unprecedented power for Trump and significant unpredictability, it’s going to be more important than ever for hedge funds to be agile and adaptable when it comes to navigating the complexities of US markets during Trump 2.0. 

More agile private equity managers could benefit from a more dynamic policy environment, and we could see more firms look to advanced big data analytical tools and AI solutions in a bid to adapt faster to volatile market environments. 

Given the uneven global implications of trade in Trump’s second term, we’re likely to see a greater reliance on Tier 1 solutions boasting advanced trading algorithms and Direct Market Access (DMA). 

Preparing for Unpredictability

Institutional investors should prepare for more erratic trading patterns on financial markets as Trump’s agenda for trade becomes clearer over the coming weeks and months. 

With the Frankfurt School of Finance and Management suggesting that tariffs could inadvertently reduce manufacturing investment, hedge funds should be prepared for plenty of twists and turns during the era of Trump 2.0. 

Hedge funds have long thrived on uncertainty, and those that can be quickest to adapt to unexpected policy changes will be best-positioned to reap the rewards throughout a four-year period that promises to be full of surprises.