Historically, the second year of a presidential term has been the weakest for hedge funds, with the HFRI Fund Weighted Composite averaging 3.46%, against more than 13% in both the first and third years.
Today, Americans across the country will head to the polls to cast their votes in the 2026 midterm elections. The buildup to such an important political event brings uncertainty on many different levels, but for funds, great opportunity has been found across a multitude of assets. This year has generated the highest hedge fund performance over the first nine months of a midterm year, the composite returned 6.88% from January to September 2026. That's the best start to a midterm year since 2006, when it made 7.10%, according to the latest HFR research.
This is contrary to the status quo: normalised annual returns for hedge funds across the four years of the presidential cycle place the second year, when the midterms take place, were 3% compared to 13% in years 1 and 3, according to the HFR fund-weighted composite index. Across fixed income, commodity, credit, and equity markets, there is often no hiding place. As the past several weeks have shown, many funds are looking for a haven to latch onto.
Many pollsters and predictions are expecting a blue wave to overwhelm Congress, with the odds strongly in favour of the Democrats winning both the House and the Senate. Inflation returning as a primary concern and the data center buildout becoming a proxy for voter resentment towards AI has left the Republicans in a precarious position. Moreover, the current squeeze on consumer prices is seen as a direct result of the geopolitical decisions taken by President Trump and his subsequent obliviousness to the pressure it is causing.
If events pan out the way they are expected, a significant Democratic presence in Congress will likely lead to greater scrutiny and pressure being exerted on the administration’s agenda. Policy stasis will ensue, with the potential of a Trump executive power off-ramp a live issue to consider for funds in evaluating positioning across fixed income and equity markets. Funds will hope the polls are within their margin of error and a split Congress is avoided. As HFR outlines, a unified Congress creates an environment where returns are almost doubled compared to an environment where loyalties and incentives are divided between the chambers.
Individual strategies also vary depending on the party of the president. The latest HFR research is nearly unanimous on which party’s presidency is most favorable for strategy performance. Equity hedge, event-driven, and relative value all favour a Democratic president, whilst macro strategy performance prefers a Republican president. In comparison to the Democrats, the Republican Party is more obvious in its behaviour to alleviate fiscal pressure, often doing this through an interventionist approach, making macro investments more clean-cut and easier to position.
Strategy performance across the four years of a presidential term also reveals significant discrepancies. Traditionally, year 1 of a new presidency produces double-digit returns across all strategies. This is followed by a large drawdown in midterm years, before bouncing back in year 3 and dropping further in year, the composite goes from 13.40% to 7.22%, as the presidency draws to a close. This pattern is most stark in equity hedge positioning, where year 1 and year 3 performance is 15% and 16%, respectively, whilst year 2 suffers a seismic drawdown to just under 4%. Political uncertainty often weighs on stock prices in the run-up to the midterms, whilst years 3 and 4 of a presidency are often spent campaigning for re-election or party continuity, which in turn has a positive effect on equity valuations and creates significant hedging opportunities.
There are several permutations and outcomes that funds have to weigh up, but the industry continues to surge in AUM growth. This year has been marked by investors continuing to pour money into the asset class no matter the circumstance.As the research shows, capital has grown at a rate of 14% from 1990–2025, despite the regular alternation between Democratic and Republican governments during that time. Moreover, assets grew 15.1% a year on average under Republican presidents and 13.1% under Democrats. Tuesday’s outcome may throw a curveball into the equation, but hedge funds have consistently demonstrated their ability to interpret the repercussions, exploit the dislocations, and generate returns.
