Hedge funds are making 'extreme' bets on the impact of Trump

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Donald Trump

REUTERS/Lucas Jackson

President-elect Donald Trump speaks during a news conference in the lobby of Trump Tower in Manhattan, New York City, U.S., January 11, 2017.

Hedge funds are piling in to the same bets ahead of the inauguration of President-elect Donald Trump.

There are "extreme market positions in all asset classes," according to Societe Generale, which said the "extreme positioning inevitably raises the question of whether investors have run ahead of themselves."

The popular trades include:

  • "Net short positions on 10y Treasury notes are at historical highs, implying that rising US bond yields remains among hedge funds' major convictions."
  • "Hedge funds have (very) high expectations for the domestically oriented US small caps of the Russell 2000."
  • "Historically long on copper and oil."

The logic behind these trades is obvious. The Trump administration is expected to increase fiscal spending and focus on employment, which in turn could lead to higher inflation and higher rates. And his pro-business policies and plan to cut taxes are expected to benefit US-oriented stocks.

"Never before have hedge funds been so bullish on the Russell," Societe Generale said. "This would suggest that hedge funds are fully convinced that Trump's economic policy, centred on protectionism and fiscal stimulus, will work out well for US small cap companies."

Trump's policies are also expected to promote economic growth and construction, benefitting cyclical commodities such as oil and copper. "The growth environment is clearly supportive, with an extension of the economic growth cycle and rising oil demand creating the right conditions to revive the OPEC cartel," Societe Generale said.

Let's look at the charts:

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