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Matthias Knab, Opalesque for New Managers: As Americans head to the polls for the midterm elections, a new special report from HFR looks at 36 years of hedge fund returns by presidential term year, by party and by the makeup of Congress. The report covers January 1990 to September 2026.
The midterm-year slump
Across business cycles and administrations of both parties, the second year of a presidential term has delivered the lowest average annual return for hedge funds. The HFRI Fund Weighted Composite Index averaged 3.46% in Year 2. That compares with 13.30% in Year 1, 13.40% in Year 3 and 7.22% in Year 4.
The pattern holds across the main strategies. Event-Driven fell to 2.83% in Year 2 from 15.05% in Year 1. Equity Hedge fell to 3.95% from 15.62%, Relative Value to 5.59% from 12.07% and Macro to 5.96% from 10.94%. Macro was the most resilient. The Year 2 dip appears under presidents of both parties: 3.88% under Republicans and 3.06% under Democrats.
These figures are averages, and individual midterm years have varied widely. Over January to September, the composite returned +7.10% in 2006 and -6.32% in 2022.
2026: an exception so far
This year has broken the pattern. The HFRI Fund Weighted Composite Index gained 6.88% in the first nine months of 2026. That is the best January-September return in a midterm year since 2006.
What the election result could mean for Q4
The more immediate question for allocators is the fourth quarter. HFR finds that hedge funds have done best in the final quarter of a midterm year when the election left control of both chambers of Congress unchanged. In those years the composite gained 4.99% in Q4, led by Equity Hedge at 5.80%, Macro at 4.05%, Event-Driven at 3.67% and Relative Value at 2.05%.
When both the Senate and the House changed hands, the composite gained 2.02% in Q4. A Senate shift alone was followed by 1.33%. The weakest outcome came when only the House majority changed: the composite gained just 0.55%, and Macro only 0.35%.
Republicans currently control the presidency and both chambers. Under HFR's historical lens, the scenario markets have rewarded most is the status quo, and the one they have rewarded least is a House-only flip. The sample is small, however. Only nine midterm elections since 1990 have a completed fourth quarter in the data.
Unified vs. split Congress
The strongest gap in the report is between unified and split legislatures. When one party controls both the House and the Senate, the composite has annualized 10.53%, against 5.52% when control is split. It makes little difference which party holds the unified Congress: 10.85% for Republican control and 10.07% for Democratic control.
Looking at the full government, including the White House, unified Democratic government has produced 11.32% annualized. Unified Republican government has produced 9.35% and divided government 8.51%.
By presidential party: depends on the strategy
Over the full period, the composite annualized 9.80% under Democratic presidents and 8.37% under Republican presidents. Equity Hedge (12.03% vs 9.06%), Event-Driven (10.99% vs 7.75%) and Relative Value (9.60% vs 6.54%) also did better under Democratic administrations. Macro went the other way, returning 10.58% under Republican presidents against 7.67% under Democratic ones.
Investor money has not followed the same pattern. Industry assets grew at an average of 15.1% a year under Republican presidents and 13.1% under Democratic presidents, against 14.0% across 1990-2025.
Methodology
HFR gives each calendar year a single classification for presidential party, congressional control and government status. In inauguration years the incoming party is applied to all twelve months. Returns are annualized geometrically across all qualifying months. HFR says the dataset is purely quantitative and implies no preference for any political party or economic agenda.
Source: HFR Industry Reports © HFR, Inc. 2026, www.HFR.com
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