On the surface, Bridgewater Associates‘ performance last month looks unremarkable.
Sure, the $150 billion firm’s flagship fund lost 1% in April, but it’s still up about 4% over the first four months of the year, according to a Bloomberg report.
So what’s the big deal? As is often the case, the devil is in the details.
While the benchmark S&P 500 limped to a gain of just 0.3% in April, Bridgewater was busy reducing its net long wagers on US stocks, according to Bloomberg. The firm now has just 10% of its portfolio allocated into net long bets, down from 120% earlier this year. Even more ominous, Bridgewater now has a net short position on US equities.
In a recent note sent to a group of clients seen by Business Insider is any indication, the firm highlighted a fear of diminishing liquidity.
Bridgewater is referring specifically to the Federal Reserve‘s plan to tighten monetary conditions, and arguing some current market drivers are merely holdovers from a more accommodative regime.
The note, written by co-CIO Bob Prince and research head Karen Karniol-Tambour, is a part of Bridgewater’s Daily Observations series, which is not meant for media consumption but is instead intended to give clients a view of Bridgewater’s thinking on markets, the economy, and geopolitics. Bridgewater declined to comment.
“The monetary tightening has pushed interest rates up, but the production of credit by the financial system is supporting economic growth,” the note read. “We represent this as about 10 o’clock on the dial.”
Once the “dial” — represented visually in Bridgewater’s note by an arrow within a feedback loop — reaches 12, liquidity will tighten in earnest. And that’s when the going will get really tough.
The note said that the combination of monetary tightening with strong growth and credit availability had kept cash flows up, but raised the discount rate on those cash flows. As a result, returns have been flat.
Once the tightening produces a downturn, it will favor bonds and hurt most everything else.
“This favors commodities and other real assets in relation to stocks, and stocks in relation to bonds, and warrants a less than normal overall exposure to financial assets and risk premiums,” it said. “Once the tightening produces a downturn, it will favor bonds and hurt most everything else.”
Wide-reaching implications
Needless to say, this is all very troubling for stock bulls. Even if you believe Bridgewater is being overdramatic, it’s difficult to avoid the psychological overhang of the world’s biggest hedge fund holding a different view than you.
It’s also worth noting that tighter lending conditions and the resulting liquidity squeeze have been cited repeatedly as a major fear by a chorus of Wall Street experts.
There are other reasons to be wary of US stock exposure, of course. They include but aren’t limited to: the prospect of a global trade war, a slowing pace of corporate-earnings growth, escalating nuclear tensions in the Middle East, and lofty valuations.
Perhaps of some encouragement to those who have money in Bridgewater’s fund is the strong performance in developed-market currencies and rates trading in April, per Bloomberg’s report. It may not have been enough to salvage a gain for the month, but it kept the firm in good shape relative to its peers on a year-to-date basis.
In the meantime, as Bridgewater scales back its US equity holdings, it’s showing increased interest in European stocks. Or rather, it’s taking a cleaver to net short bets, cutting them by 80% since February, according to Bloomberg. The firm still has a $4 billion short position in European equities, but recent disclosures show it’s been trimming select bearish wagers.
In the end, if you’re the type to take investment cues from massive hedge funds like Bridgewater, perhaps it’s time to consider weaning yourself off the US while giving Europe a chance.
And, above all else, keep a close eye on liquidity.
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