Mutual Funds Hedge Bets as Poll Shows Narrow French Election

Mutual funds are strengthening defensive positions ahead of
the first round of the French presidential election, despite
Thursday’s rally in financial markets.

Portfolio managers say the likelihood of a
larger-than-expected majority for an anti-European Union
candidate remains too high to ignore, even amid narrowing
government bond spreads, rising French stocks and a strengthening Euro Thursday.
They’re using defensive hedges such as short sales and put
options to help protect their holdings should far-right
candidate Marine Le Pen and far-left candidate Jean-Luc
Mélenchon advance to the second round.

In an interview, Etienne de Merlis, chief investment officer
at Signia Wealth, said he has witnessed an increase in the
number of short-dated put options being traded on the Eurostoxx
over the past few days. The rise in short-dated put options,
which allow investors to sell an asset at a future date at a
price agreed in advance, shows “a lot of people are
hedging themselves” for market volatility, according to De

“People are right to be cautious,” Andrew
Mulliner, a fixed-income portfolio manager at Henderson Global
Investors, said in an interview. The first round is now
“too close to call.”

A poll released Thursday by Harris Interactive shows that
four candidates remain separated by six points for the election
taking place Sunday, a narrow spread that has buy-siders
concerned that the margin for error makes the outcome too
difficult to predict. The poll, conducted April 19, places social
liberal candidate Emmanuel Macron three points ahead of Le Pen.
Jean-Luc Mélenchon is now on a par with Republican
nominee François Fillon in third place.

Mulliner said while the prospect of a Le Pen victory –
in his mind – was unlikely, and a French retreat from the
European Union unrealistic, he still is expecting volatility in
the days ahead. The error margin of pollsters is a concern for
fund managers, who point to Brexit and the U.S. election as
examples of polls failing to accurately predict voting

On Thursday, the euro climbed to a three-week high against
the U.S. dollar, or $1.07 per euro, suggesting increasing
confidence in a positive, predictable outcome. A victory for
Macron and Fillon in the first round would likely result in a
good day for risk assets on Monday, according to fund managers.
Macron and Le Pen reaching the second round would also suit
those with bets on risk assets, as polls suggest Macron, who is
pro-E.U., would defeat Le Pen should they both reach the
second-round vote on May 7.

While Mark Dowding, co-head of Investment Grade at Bluebay
Asset Management, says hedging risk is understandable, he
warned that the defensive…

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