Some large hedge funds and fund management companies have noticed that the situation of the US presidential election may change, and have started to support trades related to a Trump victory.

Although most polls still show a tight race between Trump and Harris, the market has changed in recent weeks, with assets expected to benefit from a Republican victory seeing a boost. For example, private prison operator GEO Group surged by 21% in October, poised for its best monthly performance since 2022; bitcoin miner Riot Platforms rose by 34%.

Renowned hedge fund manager Dan Loeb stated this month that the possibility of Trump's victory has increased. His company, Third Point, with 11 billion dollars in assets, has increased its positions in stocks and options that could benefit from a Trump victory.

In a letter to investors, he wrote: "We believe that the proposed 'America First' tariff policy will boost domestic manufacturing, infrastructure spending, as well as prices of certain materials and commodities. We also believe that Trump's plans to reduce regulations, especially scaling back the Biden-Harris government's aggressive anti-trust measures, will unleash productivity."

Mark Dowding, Chief Investment Officer of Fixed Income at RBC BlueBay Asset Management, has increased trades associated with a Trump victory since the end of September. Dowding's team manages assets worth 130 billion dollars, mainly focusing on interest rates and currencies.

Dowding is betting on a stronger US dollar and a steepening US yield curve, the latter implying that long-term rates will rise more than short-term rates. He is also betting that breakeven inflation rates will increase; breakeven inflation is the difference between US Treasury yields and Treasury Inflation-Protected Securities (TIPS) yields.

These three bets reflect Dowding's view that Trump's policies will stimulate inflation through increased tariffs. Trump has promised to impose comprehensive tariffs of 10% to 20% on imported goods. Economists state that increased costs are usually passed on to consumers.

Last week, Dowding flew from London to the USA to meet with policymakers and lobbyists, stating that he was "more impressed by Republicans than expected."

He said, "At the beginning of this week, I began to realize that voters are more inclined towards Trump than I thought."

Some investors are willing to engage in election-related trading, signaling a change from a few weeks ago when many found the election results unpredictable, focusing on interest rates and yields. Once Trump's chances of winning began to rise, the election became a bigger focus.

Themos Fiotakis, Global Forex and Emerging Markets Macro Strategy Director at Barclays Bank, said, "Elections have become a larger driving force in the market," linking the recent drop in the Mexican peso to Trump's momentum. Trump recently stated that he could impose a 200% tariff on vehicles from Mexico.

Fiotakis said that the options market has "high volatility and implied volatility," shorting these currencies and going long on the dollar are "no longer as cheap as two or three weeks ago."

As Election Day approaches, investors remain highly vigilant about changes in the election landscape. Many are considering potential surprises on or after November 5th, especially if the election results are questioned, or if there are delays in the vote count.

Vineer Bhansali, the founder of LongTail Alpha, a California hedge fund, said, "We don't have a crystal ball, our method involves finding factors in the market that have not yet been priced in." He mentioned that this approach paid off in 2016.

Despite this, some managers still choose to act conservatively. Jon Caplis, CEO of PivotalPath, stated that many hedge funds may be unwilling to make large-scale bets that could jeopardize this year's strong returns.

Caplis said, "For anyone among them, making large-scale bets in what still seems to be a fairly uncertain situation is neither in their interest nor in the interest of investors."

Zachary Kurz, founder of the New York hedge fund PinnBrook Capital, managing $0.5 billion in assets, said he expects to reduce some positions before the vote. He pointed out the unpredictability of the election results and the market reaction.

Kurz said, "The Mexican elections were surprising, the Indian elections were unexpected, and the French elections were equally surprising."