Hedge funds and other investors are searching for trades that profit from a win by Republican presidential candidate Donald Trump, but also offer limited downside in the event of a victory by Vice President Kamala Harris.

As the nearly deadlocked race nears, some are looking for so-called "asymmetric trades" involving bitcoin or the yuan, assets which could yield big profits if Trump wins but would not cause big losses if the wagers are wrong.

"Trading the election is difficult given how tight it is," said Edoardo Rulli, head of UBS Hedge Fund Solutions.

Some betting websites have favored Trump, which has created momentum behind the so-called Trump trades. Others are now forecasting those trades, which involve bets that could benefit from a Trump victory, could lose momentum or reverse in the case of a Harris win.

BITCOIN

Trades that could yield higher gains than losses in whichever scenario plays out include a long position in bitcoin, said David Kalk, founder at hedge fund Reflexive Capital.

He said the potential bitcoin upside would be two to three times the money which is put at risk if Trump wins, as he expects a more friendly regulatory approach to crypto under the former president. "The negative price response we expect (in case of a Harris' victory) just seems much smaller than the upside of a Trump win," Kalk said.

Macro hedge fund MKP Capital Management's founder Patrick McMahon said he sees shorting the yuan versus the dollar as an asymmetric trade, given the losses the Chinese currency may face if tariffs were imposed.

Some have placed neutral bets, such as pairing a short position on a stock with a long one, reducing directional exposure, said Robert Christian, chief investment officer at K2 Advisors. This way gains in one trade could offset losses in another.

Mario Unali, head of investment advisory at Kairos Partners, which manages a fund of hedge funds, said trades were pivoting to a Trump win because a victory for Harris is more about the status quo, so losses would be limited.

The hedge fund industry has so far posted gains of 8.3% in the first nine months of the year, according to research firm PivotalPath. The industry average is underperforming the S&P 500's 20% gain, putting some hedge funds under more pressure to adopt a more cautious stance on the race that will deliver some upside.

Jon Caplis, CEO of PivotalPath, expects some selling ahead of the election. "They could bank those returns, and then they could wait for weeks or months, depending on how long it takes before things become clear again."

TRUMP TRADE

Large wagers on betting markets have raised questions by social media users about whether they were swaying the markets or whether prediction markets were simply a better leading indicator of the race.

The Trump trades included a selloff in Treasuries, the yuan, and a rise in shares of Trump Media & Technology Group .

Because the two candidates are still neck and neck a few days from the election, some investors question whether some of the trades placed on expectations of a Trump victory may be overdone.

An average of national polls according to opinion poll aggregator 538 on Thursday had Democratic presidential candidate Kamala Harris at 48.1% versus Trump at 46.7%, a gap which is 1.3 percentage point smaller than on Oct. 1.

"At the end of the day I think this short term move in Treasuries is probably overdone," said John Luke Tyner, head of fixed income and portfolio manager at Aptus Capital Advisors.

"If Harris wins you would probably see a snap back lower in long-term yields, but I think we’re going to see it either way," he added.

Strategists at Citi said they have recently exited some of their Trump trades, including one that profited from rising five-year inflation expectations.

"We have been taking profits on the view that the risk-reward is no longer compelling for some of these trades, with prices and positioning having moved and, in our view, perhaps more than polls alone would have justified," they said in a note on Tuesday.

A Republican sweep could exacerbate the bond selloff due to higher deficit spending expectations in that scenario, but there is also a "meaningful risk of a sharp reversal in a Harris victory," they added.