Presidential Elections, Political Sensitivity, and Hedge Fund Performance

Abstract

We develop and test a hypothesis that hedge-fund managers who respond to and capitalize on the changing political environment around Presidential elections are better skilled. We find that hedge funds, on average, trade in anticipation of the Presidential election outcome, and adjust the political sensitivity of their portfolio accordingly. Managers who adjust their portfolio political sensitivity most successfully generate significantly higher alpha than those that are least successful in their adjustments. The significant superior performance by these funds persists for about a year. We also find that these funds are more likely to survive over the following two years. Our evidence suggests that hedge funds’ anticipation and response to Presidential elections indicate managerial skill and can successfully predict future fund performance.

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

JEL Classification: G11, G14, G23