Only two weeks ago, Ray Dalio, head of America’s largest hedge fund, Bridgewater Associates, reassured investors that stock markets had entered a “Goldilocks period” in which the market, like the fairy tale, was neither too hot nor too cold.
But it turns out that even then Mr. Dalio was not so sanguine about the future. In fact, Bridgewater had placed huge bets against both the German and Italian stock markets, wagering that some of the biggest names in European shares will decline, including Deutsche Bank and Italy’s second largest bank, Intesa San Paolo.
According to Handelsblatt data from the German share register, Bridgewater has taken short positions worth €5 billion ($6.2 billion) in 13 shares that are in the DAX index of leading stocks, including software giant SAP, engineering conglomerate Siemens, Mercedes-Benz owner Daimler, and phone colossus Deutsche Telekom. The shorts also included financial stocks like insurers Allianz and Munich Re, as well as Deutsche Bank.
These big declines are just minor corrections. Ray Dalio, Founder, Bridgewater Associates
An investor takes a short position by borrowing a stock and selling it on the market, hoping to buy it back later at a lower price and make a profit.
The DAX fell 2.3 percent Tuesday following the dramatic selloff on Wall Street on Monday. But US stocks seesawed wildly throughout the day, indicating to analysts that a bottom may be near.
Overall the DAX has lost nearly 1,000 points since January 26, when Mr. Dalio’s short bet was recorded, a decline of about 7 percent.
Mr. Dalio was not only betting against Germany. According to Bloomberg, Bridgewater has taken short positions in leading Italian shares totaling €3 billion, including transport infrastructure company Atlantia and Intesa. Those shares have also fallen since the beginning of the year.
While Mr. Dalio did not comment on his fund’s investment position, he did say in a post on the networking website LinkedIn on Monday that the recent decline in the market is classic behavior for stocks at the end of a boom.
“I’m not claiming to be smart about this,” he wrote. “In fact, the opposite is true, as this is happening sooner than I expected. Still, these big declines are just minor corrections in the scope of things.”
While Bridgewater’s bets seem large, they are fairly small given the overall size of the assets under management: $160 billion.
The selloff in shares is being blamed on a lethal combination of good news, in the form of high employment and economic growth, and bad, as inflation creeps upwards in a tight economy. Higher inflation could prompt the Federal Reserve to ratchet up interest rates at a faster pace than expected, which would hurt bonds and stocks.
“Leading indexes like the DAX could lose 10-15 percent,” said Martin Lück, chief investment strategist for Germany and Eastern Europe at asset manager Blackrock. He said that many investors did not expect prices to boomerang so quickly.
Bert Flossbach, co-founder of German asset manager Flossbach von Storch, says he sees the market moving lower in a “self-reinforcing correction,” and warns of a potential massive correction.
However, not all analysts are quite so negative. “We do not believe that the downward movement in the stock market is the end of the bull market,” said Henning Gebhardt, head of wealth and asset management at Berenberg Bank.
Adds James Bateman, a strategist at Fidelity: “The setbacks of the past few days seem to be the best proof that the markets are healthy.”
With his multibillion euro bets against the German stock market, Bridgewater is already ahead of the game. If the market stabilizes enough for the hedge fund to close out its short positions, Bridgewater will have to buy billions of euros in shares, which could succeed in propelling the market higher.
Jürgen Röder is a finance editor for Handelsblatt Online. This article was adapted into English by Charles Wallace, an editor for Handelsblatt Global in New York. To contact the author: [email protected].