Element Hedge Fund Reaps $3 Billion Windfall on Trump Tax Trade

(Bloomberg) -- Jeffrey Talpins’s Element Capital Management reaped more than $3 billion in the last five months, primarily on a wager that President Donald Trump’s tax bill would pass, driving stocks and yields on U.S. Treasuries higher.

Talpins put on the trade about a year ago when investors had some doubts that a tax bill would succeed. His view then was that Trump and fellow Republicans, having failed to pass major legislation, including an overhaul of Obamacare, would unite to push through a large tax cut for individuals and corporations.

The macro manager still thinks the trade has some room to run.

“We expect the U.S. equity market to fully recover the peak to trough decline and hit new highs over the next few months,” he said in a mid-February letter to investors. “As the market gradually recovers its February losses, we also expect that volatility will subside commensurately.’’

Talpins cautions, however, that he isn’t a long-term bull. The S&P 500 Index is only about 3 percent below its January peak. Once stocks surpass that point, rising interest rates, stretched valuations and a maturing economic cycle will start weighing on the market later in the year, a prediction Talpins made in an investor letter last May.

Big Gains

The tax call is the latest bright spot for the $13.5 billion Element, which Talpins started in 2005 after stints at Goldman Sachs Group Inc. and Citigroup Inc. This year its fund has already climbed 11.5 percent, following a 9 percent return in the last quarter of 2017, according to investors, fueling the multibillion-dollar gain.

The manager also posted double-digit returns in 2015 and 2016, while other macro traders including Andrew Law, Ray Dalio, Paul Tudor Jones and Louis Bacon lost money or made only a few percent. His fund has posted annualized returns of 21 percent since inception.

Talpins first made his tax call in an April 2017 letter to investors, saying a lack of cohesiveness within the Republican Party and the dim prospect of legislative support from Democrats would drive Republicans to “take the path of least resistance” in the form of a large tax cut for companies and lower marginal rates for individuals.

Stocks Prediction

A month later, he told them he had increased his exposure to stocks on the view that a tax package, deregulation, an accommodative Federal Reserve and healthy earnings “all support equity prices moving higher.” He also said at the time there was a high chance for a 10 percent correction in the next 12 months that would hit commodity trading advisers and volatility targeting funds hardest, though the market would then recover within a few months.

As stocks climbed for the rest of the year, and yields on Treasuries jumped at the very end of 2017, Talpins’s view was rewarded.

Talpins told investors in his most recent letter that the increased volatility in February was initially caused by pension funds rebalancing their portfolios at the end of January by selling about $50 billion worth of stocks. That pushed stocks lower and caused CTAs, volatility targeting funds and short volatility products to dump an additional $200 billion in stocks.

The firm, known for its heavy use of options in its wagers, used baskets of single-name equities as well as call options on the S&P 500 to make the bets. As a hedge, it shorted stock indexes outside the U.S.

Element told investors in May’s letter that it expects the Fed will raise rates by 25 basis points a quarter this year, and continue to remove accommodation.

The fund has been closed to new investments since last year, when it pulled in $2 billion of fresh capital in two weeks.

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net.

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alan Mirabella, Vincent Bielski

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