Editor’s Letter – Issue 118

November | December 2016

Originally published in the November | December 2016 issue

Hedge fund managers espouse diverse political views. Managers, including George Soros, Renaissance Technologies’ Henry Laufer and Paloma Partners’ Donald Sussman, donated far more money to Hillary Clinton’s campaign than to Donald Trump’s. Managers advising Trump include SkyBridge Capital founder, Anthony Scaramucci, Paulson founder John Paulson, and distressed investor Wilbur Ross, while activist Carl Icahn also supports Trump. What might Trump – and triple Republican control of the Presidency, Senate and Congress – mean for the industry? At this stage, only broad brush signals can be gleaned.

Trump transition team member Paul Atkins often opposed new regulations during his time as an SEC Commissioner. He also opposed escalating fines imposed on many parts of the financial services industry, arguing that these penalties unjustly punish shareholders – who are virtually never culpable. Republican proposals to apply a cost/benefit analysis to regulation make sense, but can they tame the regulatory leviathan? Though very few Republican lawmakers voted for Dodd Frank in 2010, talk of a wholesale repeal now looks unlikely. Trump’s “moratorium on all new financial regulations” seems even less probable, partly as over 100 Dodd Frank-related rules are still being shaped. Instead, new Treasury Secretary, and former hedge fund manager, Steve Mnuchin, aims to roll back particularly complicated parts of the gargantuan statute and those that hamper bank lending. Similarly, Mnuchin wants to address the complexity and subjectivity of the Volcker Rule. The objective seems to be selectively rescinding, streamlining, and rationalising, rather than revoking, these regulations.

If lighter regulatory burdens – particularly on smaller banks – unleash latent lending, the vacuum being filled by non-bank lenders, including hedge funds, could contract in the US. Similarly, if US banks are allowed to return to proprietary trading, some strategies could become more competitive and possibly crowded. And if banks are, once again, permitted to make substantial and long-term investments in hedge funds, the supply of capital chasing some trades could increase.

New opportunities may also arise. Mnuchin wants to return the GSEs, Fannie and Freddie, to private ownership, which might foster renewed competition in mortgages (though multiple legal cases are progressing through many venues). If the US does decouple from EU regulation in other areas, regulatory arbitrages may result. It took five years for the US and Europe to agree on derivatives rules, according to ESMA’s Steven Maijoor. Many in the industry, including Societe Generale Prime Services, say they prefer a level playing field globally. Still, if divergent regulation increases cross-border pricing discrepancies, there will be new anomalies for arbitrageurs to pick off.

Yet the biggest turning point might be a bipartisan paradigm shift from monetary to fiscal policy. Both candidates’ plans for fiscal expansion would be reflationary and improve opportunities for stock-pickers, Kingdon Capital founder, Mark Kingdon, told us pre-election. Fiscal stimulus absent recession has not been seen in the US for 50 years, according to some economists, and could be inflationary (even without more protectionism). Greater bond market volatility is already being welcomed by some macro managers and amplified macroeconomic volatility could be conducive to strategies including trend-following CTAs and managed futures.