Bridgewater vs Europe

Just as European markets were starting looking a little green again, the world’s biggest hedge fund appears to be turning gloomy about the continent. Really gloomy.

Ray Dalio’s Bridgewater Associates is pretty bearish on the global economy, and has already positioned itself for a sell-off in US Treasuries, US equities and corporate bonds on both sides of the Atlantic.

Now, having been relatively quiet over the past two years in European equity shorts, the $151bn-in-assets firm has popped up with 18 new disclosed short positions in European stocks, according to data group Breakout Point. As of Wednesday’s close these bets were worth around €5.6bn, according to the research company.

Such big positions are “complete outliers” in terms of size of bets taken against European stocks, says Breakout Point founder Ivan Cosovic. The only comparable flurries of shorts bets in the past have also been put on by Bridgewater.

“Both [bets] were well timed,” Cosovic adds. The first was in the opening quarter of a choppy 2018 for stocks, and the second at the start of the coronavirus pandemic in March 2020. (Although that did not stop 2020 being a miserable year for the hedge fund giant, when it lost around $12.1bn, according to LCH Investments)

FTAV should stress that it’s unclear whether Bridgewater’s bet is an outright short or a hedge against another positions. With data like this it is often like looking at a complex map through the bottom of a coke bottle, and Bridgewater did not respond to a request for comment.

But these short positions are hefty and numerous, and certainly look like a broad bet against Europe?

Bridgwater’s new European short positions are in — deep breath — BNP Paribas, Vinci, Schneider Electric, Air Liquide and Total in France, Bayer, Munchener Re, Allianz, Vonovia, Infineon, Deutsche Börse and BASF in Germany, Iberdrola, Banco Bilbao and Banco Santander in Spain, ASML and ING in the Netherlands and Intesa Sanpaolo in Italy. All were taken at or just above the 0.5 per cent disclosure threshold.

Last week the FT reported how Bridgewater is betting against corporate debt, with co-CIO Greg Jensen arguing that inflation is going to be WAY stickier than economists and the market predict. Jensen argues that if the Federal Reserve seriously tries to tame inflation “they may tighten in a very strong way, which would then crack the economy and probably crack the weaker [companies] in the economy”.

Volatility in US stocks was being driven by the ending of the Fed’s quantitative easing programme, he said. This meant other investors were stepping in to buy bonds in place of the Fed, and in so doing were selling other positions such as stocks.

Bridgewater’s bearishness echoes that of a number of other high-profile hedge fund managers, including BlackRock’s Alister Hibbert and Lansdowne Partners’ Peter Davies, who have recently been cautious even after a large sell-offs in stocks this year.

And inflation staying higher for longer than the markets expects is a view shared by Kenneth Tropin, founder of Graham Capital and one of the pioneers of macro investing, who recently told the FT that investors were underestimating how long it would take for inflation to fall back to target.

If successful, Bridgewater’s bet will add to an already-successful 2022 for the firm, even as many investors are suffering painful losses: so far it has chalked up a 26.2 per cent gain in its flagship Pure Alpha fund this year.