Things have sure been strange in the world of hedge funds lately.
Take Bridgewater, whose founder on January 23 was mocking cautious investors everywhere saying “we are in this Goldilocks period right now. Inflation isn’t a problem. Growth is good, everything is pretty good with a big jolt of stimulation coming from changes in tax laws. If you’re holding cash, you’re going to feel pretty stupid.”
It has since emerged that during this exact time, Bridgewater was building – and continues to build – a massive short position against European corporations which is now fast approaching $15 billion and includes such giants as Deutsche Bank, Siemens and Total. Meanwhile, after warning that the “we’ll probably have a much bigger shakeout coming” over the weekend, on Monday a contrite Ray Dalio admitted that he was wrong to mock those hodling cash, and explained the reason for his bearishness – and hypocrisy – stating in a LinkedIn post that everything “had changed” in the ten days since the Payrolls report, with inflation suddenly a far greater risk.
Of course, that does not explain why Bridgewater was already bearish and was already building what is shaping up to be the hedge fund’s largest thematic short in history.
End result: the world’s largest hedge fund made a substantial paper profit on the short side thanks to its multi billion European short (that’s the only short the fund is required to disclose, so one can only speculate where else it may be shorting).
Now take that “other” hedge fund, quant giant Renaissance Technologies (also known as the “Puppetmaster Behind The US Presidential Election“). Unlike a mocking Dalio, in January, RenTec’s head of risk control, Ed Hubner, penned a letter issuing a red alert to investors in RenTec’s public-facing Institutional Equities Fund, RIEF, warning them to brace for “possible market turbulence” and the “significant risk” of a correction, and that while accelerating global growth, corporate tax reform and a business-friendly administration in the U.S. have contributed to market gains, “it’s not clear these factors justify current valuations, especially in light of sovereign debt levels.“
Further, in a surprisingly accurate preview of things to come just days later, Hubner warned that “the downward technical pressure on the VIX, due to the growth of strategies that bet against market volatility, and lower correlations within the S&P 500, shouldn’t be confused with unshakable economic calm.”
On Monday 5, the day of the volocaust, the world understood precisely what he meant.
And yet, while RenTec was dispensing with warnings, it refused to put its – and its investors’ money – where its mouth was. In fact, as Bloomberg reports, the hedge fund that in January warned clients of a “significant risk” of a correction, lost 5.4% this month through Feb. 9, as a result of the correction it correctly predicted would happen.
Since Jan. 1, the Renaissance Institutional Equities Fund is down 3.4 percent, according to an investor document seen by Bloomberg News. Known as RIEF, the strategy trades only U.S.-listed equities and is biased toward stocks that Renaissance’s models expect to rise. It’s designed to outperform the S&P 500 Index by 4 to 6 percentage points and managed about $22 billion as of the end of last year.
So to summarize: Bridgewater mocks market skeptics as it covertly builds a major short bet, and then – to much fanfare – announces that its bullishness was misplaced, and that the business cycle is much further along that it had expected… meanwhile RenTec warns there is a “significant risk” of a market correction, that market correction hits just days later, and the result is a major hit for RenTec which, just like Dalio, refused to practice what it was preaching, and immediately suffered the consequences.
Moral of the story: at any and every opportunity, hedge funds will lie to you, and the bigger the hedge fund, the bigger the lie.