5 Ways to Prepare Your Portfolio for the Upcoming Election
Evaluate Your Portfolio Relative to Potential Election Outcomes with Omega Point
As election season in the US reaches a crescendo ahead of November 5th, polling data remains incredibly close and the outcome is essentially a coin toss. With economic indicators and market trends offering conflicting signals, it is crucial to apply multiple lenses to understand your portfolio's positioning relative to different election scenarios.
Omega Point's new index workflows, paired with election indexes from our prime broker partners, provide a powerful toolkit for assessing and adjusting your portfolio across various election scenarios. Specifically, you can:
- Assess performance and risk characteristics of indexes alongside your portfolio
- Calculate your portfolio's predicted beta to an index on the fly
- Understand market themes captured by these indexes
- Use indexes as a benchmark to gauge your active exposure
- Run "What-if" experiments to evaluate the impact of trades that align your portfolio with desired themes
Our election indexes, constructed by the top prime brokers, are designed to capture the winners and losers from Democratic or Republican policies. For instance, a “Republican Policy Long” index is heavily weighted towards sectors that benefit most from corporate tax cuts and deregulation, such as Banks, Consumer Finance, and Oil & Gas. A “Democrat Policy Long” index has the highest sector exposure to Automobiles, Electrical Equipment, and Homebuilders in anticipation of increased focus on green energy and infrastructure investment. Our partners also generate market neutral policy long/short pairs that represent each party.
Let's now explore how we can leverage these indexes in Omega Point to help you navigate the election.
1. Evaluate Index and Basket Performance and Identify Risk Factors
Omega Point allows instant analysis of performance and risk for these indexes alongside your portfolio. In this view, we are able to assess and compare the various policy indexes across different time periods alongside your own portfolio. Here, we see cumulative return for the Democrat and Republican Policy Pairs vs. a market neutral L/S book since President Biden dropped out of the race.
Since July 21st, the Republican Pair has underperformed by -5.8% while the Democrat Pair is up +3.4%. This suggests the market has skewed towards Democratic policy once VP Harris entered the ring. The Democrat Pair’s outperformance has been entirely driven by alpha (+17.85%), while style factors like Volatility and Market Sensitivity have hurt the Democrat portfolio and provided a tailwind for the Republican Pair.
This view can give you a clearer picture of how these indexes are trending throughout the election cycle, as well as your potential vulnerabilities and opportunities inherent to each possible outcome.
2. Predicted Beta Calculations for Market Sensitivity Analysis
This feature allows you to determine your portfolio's sensitivity to the broader market, as well as any index. For example, a quick analysis of a sample US healthcare portfolio reveals a meaningful increase in beta to the stocks held in the Republican Policy Pair index over the last three months, seen here as the "Custom" beta.
This view empowers you to identify and fine-tune your investment strategy based on your election expectations.
3. Active Comparisons View
Omega Point allows you to apply any index as a benchmark against your portfolio, enabling you to identify your performance, risk, and exposure in excess of the target benchmark. This approach can be useful when used in conjunction with the election baskets as you can quickly compare tilts across many factors simultaneously. Below, we can see this portfolio’s exposure to the Style factors in the Wolfe US Model, relative to the Democrat Pair index.
This particular portfolio has much higher exposure to Profitability, Earnings Yield, and Interest Rate Beta relative to the index, while extremely underweight the Short Interest and Volatility factors. The manager might want to take action by trimming names with outsized exposures to these factors if she would like to be more aligned with the Democrat index.
4. Gain Thematic Insights for Informed Decision-Making
Omega Point has an abundance of tools that allow you to understand the themes captured by these indexes, allowing you to track emerging trends and make strategic decisions based on broader market dynamics. For instance, if we look at the contribution to performance for the Republican Pair index in the Wolfe US model, we can see that Interest Rate Beta has created major drag on returns, down -1.8% over the last three months.
By analyzing these indexes in Omega Point, you can gain valuable thematic insights into trends that are shaping in the market, including which style factors and industries are expected to outperform under different scenarios.
5. Simulate Index and Basket Trades for Strategic Decision-Making
Omega Point’s “What-if” experimentation tools allow you to simulate trades and create hedges to tilt towards or insulate your portfolio from any market swings that might occur in early November. For instance, a portfolio manager who anticipates a Blue wave might want to add the Democrat Pair index to their portfolio in order to tilt it towards the sectors that would outperform and away from the sectors that would underperform in that scenario.
Alternatively, a manager who is unwilling to make an election bet might want to reduce their exposure to both indexes and can easily do so using the Rebalance tool. In both cases, they are able to backtest various pro-forma scenarios before executing the trades.
We encourage you to leverage Omega Point’s index workflows, combined with our prime broker partners’ dynamic election indexes, to gain a full understanding of your portfolio’s positioning during this pivotal time. It is vital to use the numerous lenses and tools available in Omega Point to eliminate blind spots, unlock the full potential of your portfolio, and ensure your strategy is aligned with your outlook in this election year.
Interested in learning more? Contact us.
