Do Hedge Fund Managers Understand Politics? Political Sensitivity and Investment Skill

Abstract

We show that hedge fund managers who better understand the dynamic U.S. political landscape actively adjust the political sensitivity of their portfolios and improve their investment performance. Specifically, around U.S. Presidential elections, funds that tilt their portfolios toward market segments expected to perform better during the new political regime generate significantly higher alphas. Further, hedge fund families with greater responsiveness to political changes exhibit persistently superior performance and are more likely to survive. Hedge fund investors reward more responsive fund managers with greater inflows.

Keywords: Hedge funds, political sensitivity, Presidential elections, portfolio adjustments, performance evaluation, managerial skill.

JEL Classification: G11, G14, G23