Keep your politics out of your investments
I keep telling everyone that you should keep your politics out of your investment portfolio.
The market doesn’t care about your politics. That is why I am against ESG investors that exclude certain industries from their portfolio, just like conservative investors who think climate change is a hoax and don’t invest in wind and solar energy.
But even the supposed ‘smartest investors’ working at hedge funds seem unable to heed that advice.
A study from the Singapore Management University examined the portfolio holdings of US hedge funds and compared how well these portfolios aligned with the economic policies of the incumbent US President.
To do this, they measured the share price reaction of every US stock to economic policy announcements by the President at the time, which allowed them to measure the portfolio sensitivity of each hedge fund to these announcements.
The chart below shows the hedge fund alpha after correcting for the Fung and Hsieh hedge fund risk factors for portfolios sorted by political alignment.
Hedge fund managers that are politically aligned with the President (measured by the political donations they make) also run portfolios that are more aligned with the President’s economic policies.
But the portfolios that are most aligned with the President’s economic policies underperform the least aligned portfolios by about 4.4 per cent per year.
In essence, these aligned portfolios are betting on something the market already knows, namely, the economic leanings and intentions of the President. So a lot of that information is already in the price.
At the same time, stocks that do not benefit from the President’s economic policies tend to be shunned by investors, making the same mistake, and as a result have higher future returns.
Of course, we don’t know if the explanation I just gave is the real cause or whether this study just measures correlation.
But what the study does is look at unanticipated events that increase political polarisation, like mass shootings and political protests in cities where the hedge funds are based.
And they find that after such events, hedge fund portfolios that were already aligned with the President’s policies align themselves even more and subsequently underperform even more.