Just six days away from final voting, several top funds see former Vice President Joe Biden winning the presidency as well as the possibility of a so-called blue wave in which Republicans also lose control of the Senate.

Asset managers UBS O’Connor, Harvest Volatility Management and MKP Capital Management -- with a total of more than $12 billion in assets -- say the odds are that President Donald Trump will be unseated, and they have embraced an array of strategies from buying value stocks to betting on commodities to cash in on the outcome.

“We’ve been obsessing over this for the past three months,” said UBS O’Connor Chief Investment Officer Kevin Russell. “This election that was such a big and obvious risk event is turning into a much more benign scenario from a risk perspective.”

Yet for all the agreement on the direction of the election, funds are being cautious to ensure they keep the gains already made in a rough-and-tumble 2020. They aren’t going all-in on one big bet because there’s potential for a late-campaign surprise -- as recent election history has shown -- or a contested result.

As a group, hedge funds have a spotty record at forecasting markets in recent years. The $3.3 trillion industry’s returns trail the S&P 500 in 2020 and lagged behind the U.S. stock index in four of the six prior years, according to data compiled by Bloomberg.

Hedge fund managers appear to be tracking the sentiment on Wall Street. The Cboe Volatility Index -- known as the equity market’s “fear gauge” -- has been relatively subdued this month, in large part because traders are wagering on a Biden win. While some Wall Street analysts are focusing on potential benefits from the Democrats’ agenda, such as an increase in fiscal stimulus, others have raised concern that its tax increases could hurt corporate profits.

Billionaire investor Stan Druckenmiller said at a conference Tuesday that a sweep by Democrats and the specter of higher taxes and inflation will weigh on equities in coming years.

Poll aggregator FiveThirtyEight’s forecasting model gave Biden an 88% chance of winning the Electoral College as of Tuesday, though concerns linger that a tight race could lead to a contested legal fight given the polarized electorate, a record number of mail-in ballots and Trump’s hurling of unsubstantiated charges of voter fraud.

UBS O’Connor’s algorithms put a better than 50% chance on a blue wave, Russell said in an interview. The UBS Group AG unit’s $2.4 billion multi-strategy hedge fund had, as of Oct. 27, modestly pivoted toward value-oriented industrial stocks such as those in the steel and materials sectors, which could benefit from Biden’s $2 trillion infrastructure and green-energy plan.

Josh Silva, a portfolio manager at Harvest Volatility Management, said he is long commodities and small-cap stocks because they could get a boost from a Democratic sweep.

Scott Bessent, head of Key Square Capital Management, told investors in a letter that the probability of a Biden win that’s confirmed within 72 hours of the polls closing on Nov. 3 is about 50%. In the event of a blue wave, he’d be short U.S. 10-year Treasurys as well as 30-year notes, he said.

Bessent also said he’d go long the yen, the yuan (along with 5-year China government bonds), the Mexican peso and a basket of currencies including the South African rand, the Colombian peso and the Brazilian real (along with 5-year bonds). Stock wagers would include Chinese shares and a basket of industrials, transports, homebuilders and commodity producers, he said.

Managers may be relieved when the contest is over -- and with good reason. Over the past two decades, hedge funds have performed better on average in the three months after a U.S. presidential showdown than in the three months prior, according to research firm PivotalPath.

Macro hedge fund MKP Capital, which managed $2.2 billion as of the end of 2019, also believes the election will be a boon for risk assets regardless of the outcome -- as long as the Phase III trials for a Covid-19 vaccine prove successful, according to an Oct. 21 letter to investors. The firm’s base-case scenario is a blue sweep that, paired with early approval of a vaccine, would see at least 10% added to equities, the letter says.

Broad Reach Investment Management sees a Biden victory as the likeliest outcome, the firm told investors in a third-quarter letter. That could boost emerging markets by calming the “unpredictability and volatility” fueled by Trump, the macro fund wrote. Expansive fiscal policy, especially if the Democrats take the Senate, coupled with a recovery from Covid-19 might “super-charge” returns from the developing world, according to the firm.

Volatility Bets

Some funds are trading around volatility itself.

“That is a reasonable play where you don’t have to take a position on the election directionally,” said Jonathan Caplis, PivotalPath’s chief executive officer.

Brevan Howard Asset Management, which this month acquired a 25% stake in volatility hedge fund One River Asset Management, has been long volatility for most of the year. While the firm sees a “significant probability” of a Democratic sweep, it also points to a 15% to 20% chance of a contested election that could push a resolution into January, according to an October letter seen by Bloomberg.

Potential turbulence has others treading cautiously. Many discretionary global macro funds have curbed risk by reducing leverage or putting on hedges, Caplis said.

Equity funds also are cutting exposure, said Darren Wolf, who oversees $14 billion as head of alternative investment strategies for the Americas at Aberdeen Asset Management. Memories of 2016 are raw after many investors were wrong about both the election result and the market reaction. They’re wary of a dispute this time.

“The scariest thing would be uncertainty over the outcome,” Wolf said.

Savoie Capital, a $1.2 billion asset manager for family offices, is focusing on policy-related trades for any outcome, chief investment strategist Ben Phillips said. It’s increased wagers on infrastructure companies such as Evoqua Water Technologies Corp. and Construction Partners Inc., which he expects to benefit from spending under either administration.

Zachary Squire, CIO at systematic macro hedge fund Tekmerion Capital Management, expects that whichever candidate wins, the yield curve will steepen as growth and inflation pick up in the U.S. His fund is going short U.S. interest rates versus those of slower-growing Japan and Australia.

“Given the equity markets have run as far as they have, yields are the under-appreciated opportunity,” he said.