By Svea Herbst-Bayliss and Lawrence Delevingne
NEW YORK (Reuters) - Hedge fund managers were largely united in their dislike for Donald Trump before the election. Now they are optimistic that he can use his pro-growth policies to improve the economy - and their portfolios.
"Investors ... were over-weighing the negatives of his unpredictability as a potential President and they were under-valuing how positive from a policy perspective him with a Republican Congress would be for the markets," said Jason Karp who runs $3.8 billion Tourbillon Capital Partners. "It's unequivocally positive for business."
Research firm Preqin said this week that nearly three-quarters of fund managers polled since the election expect lower corporate taxes to provide the biggest boost to the markets. Almost half also see their U.S.-based assets getting a lift.
Spending on infrastructure like bridges and tunnels are also seen as positive and underpinned the stock market gains. Even expected interest rate hikes from the Federal Reserve after years of easy money are not seen hurting the anticipated recovery.
In the week since the Nov. 8 election, hedge funds have scrambled to buy more financial and some healthcare stocks and lighten their stakes in technology companies, managers and industry analysts said. Bank stocks are up 14 percent since Election Day, while biotech names have gained nearly 9 percent and health insurers have risen 11 percent.
Calling the Republican party's sweep of the White House and Congress a "regime shift," Karp said the rally in financial stocks could continue once some of Trump's proposed pro-business plans take effect, citing tax cuts and looser regulations that could promote lending.
Regional banks could benefit the most if capital requirements are eased, said Dawn Fitzpatrick, global head of equities, multi-asset and the O'Connor hedge fund businesses at UBS Asset Management. The Dodd-Frank financial overhaul law is unlikely to disappear she said, but "the pendulum will shift to be less extreme."
Steven Einhorn, vice chairman of $4 billion Omega Advisors, expects the Standard & Poor's 500 Index to rise between 6 percent and 8 percent next year, noting his forecast could even be too conservative.
"The earnings impact of a Trump presidency will outweigh the increase in interest rates," Einhorn said.
All of the managers were speaking at the annual Reuters Global Investment Outlook Summit in New York this week.
Only a few weeks ago, hedge fund managers largely worried that Trump was not qualified for the nation's highest office and viewed him as a source of instability.
There were also widespread predictions that the stock market would decline 10 percent or more if Clinton lost. Trump had unkind words for the industry, calling managers "paper pushers" who "get away with murder" because of their sometimes low tax rates.
Now managers and investors are quickly adjusting to the new reality, in part because the industry is eager for some good news after years of lackluster returns and growing criticism from investors about high fees. Assets are still near a record $3 trillion but managers note their image has been hurt as some institutional investors, especially public pension funds, are pulling back.
Gains have been elusive for many funds even in the wake of the stock market's climb, managers and analysts said. Data from Morgan Stanley (NYSE:MS) show the average global hedge fund's post election returns are flat. U.S. and European funds that pick stocks have lost some money, the data show.
Tourbillon's Karp said an end to gridlock in Washington could support a better environment for hedge fund managers where active stock pickers could benefit from both more moves up and down and companies being judged more on their earnings again.
"Our job is to find things that are harder to figure out," he said.
But some managers urged caution on the investment optimism around Trump.
"Some investors feel the rally in the banks and insurers is overdone," said Michael Weinberg, chief investment strategist at hedge fund investment firm Protégé Partners. He said one view is that earnings are not going to rebound as quickly as some think.
Managers also said they realize that a trade war with countries such as China or Mexico could hurt the United States and the markets they invest in.
Whatever the markets do, one of the industry's most experienced investors urged some calm.
"Donald is so much better for our economy long term than Hillary would have been," Carl Icahn said. "You can't have more of the same in this country."
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(This story corrects to remove extraneous words in paragraph 20.)