By Nell Mackenzie, Carolina Mandl and Summer Zhen

LONDON (Reuters) – Hedge funds are positioned for Donald Trump’s U.S. presidency with the highest level of borrowing since 2010, while betting on the dollar will continue to rise, according to bank research and industry data.

US stock trading hedge funds started the week with gross leverage levels at their highest range since 2010, a note from Morgan Stanley (NYSE:) The primary brokerage seen by Reuters shows. Gross leverage shows how much a hedge fund has leveraged its market position.

European stock traders bet that European equities will rise, especially in financial, technology and energy companies, the note said.

Lower taxes, deregulation and higher tariffs could create tailwinds for some U.S. stocks, but tariffs and increased volatility could limit gains more broadly, said a note in investment by James Hanbury and Jamie Grimston, portfolio managers of two funds at Lancaster Investment Management in London that manage nearly $1.4 billion in assets.

“This will continue as long as the US fiscal deficit is more than 6% of the economy currently at full employment,” the letter said.

Higher volatility and lower regulation “should be beneficial for Plus500 (LON: ) and IG Group where we have a small holding,” it added, referring to financial firms in which the hedge fund has a high position.

AMERICA FIRST

Trump began his tenure in the White House with a number of protectionist policies to boost America’s economic interests in trading partners.

Heading into the inauguration, hedge funds dumped emerging market stocks outside of China in the biggest net selloff since October, a separate note from Goldman Sachs said on Friday.

Chinese trading by hedge funds fell to a five-year low, the note said.

Hedge funds that trade macroeconomic signals, including systematic trend followers, continue to bet on a strong dollar, a separate weekly note from JPMorgan said on January 13.

Barclays (LON:) said in a separate note that CTAs’ – commodity trading adviser funds that sell futures and other derivatives – long dollar bets “stretched, especially against the euro. “

“Looking at the markets ahead … we are strong supporters of the Trump trade in currency markets, the dollar is strongly higher in the G10, especially against sterling and the euro,” said Russel Matthews, a senior portfolio manager of global macro at RBC BlueBay Asset Management, in London.

Russel said the investment manager is short the pound against the dollar “very aggressively,” given how deeply the UK Labor Party’s policies have been “picked and criticized.”

A short position means that an asset will weaken in value.

While RBC BlueBay took some of its sales off the table, the company expects continued dollar strength to push the euro to $1 or below.

“We know there will be punitive measures to be taken against Europe … we have yet to see what it will be, but it is coming,” Matthews said.

Some portfolio managers are looking at the impact of a stronger greenback on businesses and countries with dollar debt.

“You may see a strengthening dollar that could lead to problems for many emerging market companies with debt issued in dollar terms,” ​​said Sina (BitStamp : ) Toussi, chief investment officer of special situations hedge fund Two Seas Capital, with $1 billion in assets under management. He added that countries with high external debt in dollars may also struggle.

“We haven’t seen any real dislocations in the market, but we’ve spent some time trying to anticipate where some of those dislocations are going to happen.”

Trading in Chinese hedge funds expected a near-term rally, especially after Trump said on Tuesday that his administration was discussing a 10% punitive duty on Chinese imports.

Stanley Tao, CIO of Golden Nest Capital, a Hong Kong-based hedge fund that manages $250 million, remains cautious in the first half of the year, as it takes time to see what action Trump will take. and how China will respond.

“If the Trump administration is harsh on China, China may launch unconventional stimulus measures, which may benefit the stock market,” Tao said.

He favors stocks driven by domestic demand and exporters targeting non-US countries, while he said he would stay away from the auto sector, companies with overcapacity issues and directly exposed manufacturers. at risk of tariffs.