Investors watch the trading board at the Colombo Stock Exchange. (Photographer: Luis Enrique Ascui/Bloomberg News)

Hedge Fund Managers See Echo of Past Crashes in Markets

(Bloomberg) -- The ranks of hedge fund managers expecting impending market chaos are growing.

Greg Coffey, the former star manager at Moore Capital Management who started trading at his own firm this year, is comparing the turmoil in May to the end of dotcom bubble in 2000. Horseman Capital Management’s Russell Clark, one of the most bearish hedge fund managers in Europe, invoked memories of the financial crisis of 2008 in a letter to clients.

The two managers, among the best-known in Europe, join a growing chorus of investors predicting an end to the decade-old rally in asset prices, as central banks move to normalize policies and the rise of populism threatens trade across the globe. Billionaire George Soros in May warned of a looming financial crisis and an existential threat to the European Union. Crispin Odey has for years expected a market crash and lost money betting on it.

“The ghosts of 2000 are upon us,” Coffey wrote in a May investors letter for his Kirkoswald Capital Partners. “Make no mistake, this is the current investment environment we are in, and will be through 2018.”

Officials for Horseman and Kirkoswald declined to comment.

Painful Years

Betting on a crash -- one of the key abilities hedge funds have over traditional investment funds -- has been a painful strategy for years as central banks across the globe bought assets to prop up markets. Odey’s European Inc. hedge fund lost almost 50 percent in 2016 and a further 22 percent last year.

“Since the global financial crisis, the number of doomsayers has risen exponentially,” said Philippe Ferreira, a Paris-based senior cross-asset strategist at Lyxor Asset Management, which oversees about 73 billion euros ($85 billion) in so-called alternative and active strategies. “But aside from political risks, the global economy is doing well."

Still, there’s some evidence that the market calm of past years may be ending. Trillions of dollars were erased from global stocks in early February when a sudden surge in volatility surprised investors who were betting that central-bank money printing would keep markets calm. The wild ride resumed in May when political turmoil in Italy sparked a selloff, and continued into this month amid trade stress between the world’s biggest economic powers.

Making Money

“A number of managers missed out the last bull market and got sidelined,” said Nicolas Roth, head of alternative assets at Geneva-based investment firm Reyl & Cie. “They are now betting on a correction as an attempt to generate hefty performance should something happen.”

The chaos in May helped billionaire Alan Howard gain 37 percent in his $2.3 billion hedge fund last month, while his firm’s main money pool added 7.6 percent, its best monthly return since the 2008 financial crisis. Clark’s fund was up 4.3 percent through May this year and Coffey’s returned 3.7 percent during its first two months of trading, according to their newsletters.

Read more about how macro hedge funds made money in May.

Clark, whose firm oversees $1.2 billion, wrote that the current market patterns remind him of 2008, a year his hedge fund surged 31 percent. Margins and valuations are high, while commodities and interest rates are rising. Momentum strategies and exchange traded funds are herding ever more money into assets that worked up to now, such as technology, even as the fundamentals begin to deteriorate, Clark wrote in his letter for May.

‘Against Consensus’

“We are so against consensus in so many areas, I am more excited than worried at this point,” he wrote, adding he is sticking with his bearish positions despite two months of losses.

Odey, a vocal critic of central bank policies, cited this evidence for possible troubles ahead: The stocks investors bet against most heavily have risen by almost 30 percent in two months, according to Odey. The correlation between this happening and a market correction within six weeks is more than 80 percent, the hedge-fund manager wrote in his May letter. Odey has made money every month this year.

“The last five years of quantitative easing has floated all assets and all strategies. Investors were rewarded for both inactivity and buying the dip in everything,” Coffey wrote. “That approach will be challenging this year.”

©2018 Bloomberg L.P.

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