Why Hedge Fund Hot Shots Finally Got Hammered – David Stockman’s Contra Corner 09-06-15

Salient to Investors:

David Stockman writes:

A growing chorus of investors blamed last week’s stock market sell-off on esoteric but increasingly influential trading strategies pioneered by hedge funds like Bridgewater.

Hedge fund performance has benefited from broken capital markets rigged by the Fed. Thesecasino gamblers bought every one of the 30 identifiable dips in the SPX since the March 2009 low, confident that the Fed would intervene to keep the stock averages rising. A few ten thousand punters have made trillions in return for little economic value added.

Bridgewater profited by buying more stocks when prices were rising and equity volatility was falling, and more bonds when prices were dipping and equity volatility was rising as investors retreated to fixed income securities. Pumping out volatility and milking the market on alternating strokes is only possible when the regularity of market waves are unnatural, engineered by a Fed held hostage to the casino gamblers. However, bond prices in August did not rise like they were supposed to when the stock market dropped 12%, so Bridgewater’s entire profits for the year were wiped out in a few days. Bridgewater now pleads for QE4, while Goldman Sachs said the latest jobs report calls for no rate increase in September, despite the failure of 80 months of ZIRP.

China’s 20-yr long, $4 trillion cumulative bids for US treasuries and DM fixed income securities has now become “offers”, and which will prove to be one of the great financial pivots of history. China bought US debt to peg the RMB exchange rate and keep its exports humming, but eventually was forced to let the RMB slowly rise against the dollar, drastically accelerating global fund inflows into the Chinese economy. Deng’s naivete unleashed a credit monster that sucked in capital and resources from all over the globe into a domestic spending boom that was inherently unstable. To prevent the RMB exchange rate from plunging and inciting even more capital flight, the PBOC has now shifted into reverse in a large, sustained and strategic way.

If the market holds above next week’s retest of the SPX 1967 low, the Fed will likely announce a “one and done” move in September, and if the market does not hold this low, then the Fed will defer its rate rise: both outcomes will cause a short-lived, half-hearted rally, but not another leg higher in the phony bull market because the global “dollar short” is unwinding and China’s house of cards is cratering, causing economies to plunge throughout the China supply chain.

Read the full article at http://davidstockmanscontracorner.com/why-hedge-fund-hot-shots-finally-got-hammered/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Sunday+10+AM

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Dalio Patched All Weather’s Rate Risk as U.S. Bonds Fell – Bloomberg 08-14-13

Salient to Investors:

The decline at Bridgewater Associates’ All Weather fund and similar funds shows allocating assets between stocks and bonds can leave investors overexposed to rising interest rates.

Ramin Nakisa at UBS Investment Bank said June’s sell-off in Treasuries and inflation-linked bonds was just a dress rehearsal for the volatility awaiting when QE tapering begins.

Larry Swartz at Fairfax County Retirement Systems said stocks really depend on increasing expectations of growth.

Ben Inker at Grantham, Mayo, Van Otterloo contended that risk parity owes much of its success to the tailwinds of a 30-yr bond market rally, because the funds invest a large portion of their assets in debt and related instruments. Inker in March 2010 said the beguiling combination of lower risk and higher return that the risk-parity strategy appears to offer is largely an illusion.

Thomas Lee at Clifton Group said excessive interest-rate risk has been the chief complaint thrown at every risk-parity strategy for years and years.

Robert Prince at Bridgewater said rising interest rates generally stem from accelerating economic growth or increased inflation, environments in which bond losses could be offset by profits on commodities and stocks. Price said the exception to this scenario would be a small subset of cases such as an extreme Fed tightening of liquidity or an implosion of the financial system in which all asset prices decline, and whose impact would be short-lived.

John Brynjolfsson at Armored Wolf  said Bernanke’s words in June were radical, and implied he would be comfortable with inflation being below target rather than keeping his foot on the gas pedal until inflation exceeded the target.

Eric Sorensen at PanAgora Asset Mgmt said judging duration for equities is messier than for bonds because a stock’s duration is also influenced by the type of company being examined and the reason rates are changing. He said that when inflation pushes rates up, bonds generally decline while stocks, particularly cyclical companies, fare well, allowing a risk-parity fund to offset fixed-income losses with equity gains.

Sorensen said stocks and bonds have both fallen in response to rising rates several times during the past twenty years: e.g. in early 1994, and the time to hedge that kind of risk is not when the risk is upon you – if you had been hedging throughout for the potential of stocks and bonds to have a high correlation to rate movements, you would not have made as much money.

Woody Jay at CRT Capital said the most popular trade of the last year has been on the back of QE, that it has to drive up inflation at some point – the trade was so one-sided, it was not surprising that TIPS were overdone in the sell-off.

Read the full article at  http://www.bloomberg.com/news/2013-08-14/dalio-patched-all-weather-s-rate-risk-as-u-s-bonds-fell.html

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