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Dalio causes stir with $18 billion surge in European short bets

Dalio causes stir with $18 billion surge in European short bets

by Bloomberg 3 min. 15.02.2018 From our online archive
Dalio leads his firm down path few other funds care to trod
Dalio's hedge fund is shorting a number of European powerhouses (Shutterstock)

Ray Dalio, billionaire philosopher-king of the world's biggest hedge fund, has a checklist to identify the best time to sell stocks: a strong economy, close to full employment and rising interest rates.

That may explain why the firm he created, Bridgewater Associates, has caused a to-do the past two weeks by quickly amassing an $18 billion (€14.4 billion) bet against Europe's biggest companies. The firm's total asset pool is $150 billion, according to its website.

Economic conditions in Europe appear to fit Dalio's requirements. Last year, the continent's economy grew at the fastest pace in a decade, and European Central Bank President Mario Draghi has indicated he's on a slow path toward boosting rates as economic slack narrows.

Factories around the world are finding it increasingly hard to keep up with demand, potentially forcing them to raise prices.

But Dalio is leading his firm down a path that few other funds care to trod.

Renaissance Technologies, most recently famous for its association with Breitbart donor Robert Mercer, is only $42 million short in Europe. Two Sigma Investments is betting even less than that. Kenneth Griffin’s Citadel has less than $2 billion in European company shorts.

Mario Draghi (AFP)
Mario Draghi (AFP)

So Dalio will rise or fall virtually on his own.

Bridgewater didn’t respond to requests for comment.

Wonder why

"It is not unusual to see strong economies accompanied by falling stock and other asset prices, which is curious to people who wonder why stocks go down when the economy is strong and don’t understand how this dynamic works," Dalio wrote in a LinkedIn post this week.

Bridgewater's shorting spree started last fall in Italy.

With the country's big banks accumulating billions in bad debt, Bridgewater mounted a $770 million wager against Italian financial stocks. Saddled with non-performing loans and under constant regulatory scrutiny, they made for a juicy target.

Throughout the fall and into winter the bet against Italy represented the majority of Bridgewater’s publicly disclosed short positions. The initial bet was eventually raised to encompass 18 firms and nearly $3 billion.

Around the beginning of February, when Dalio was telling the World Economic Forum in Davos, Switzerland, they'd "feel pretty stupid" for holding cash, Bridgewater's strategy changed.

Italian financials remained in the cross-hairs, but the short list started including members of the Euro Stoxx 50 Index, the Eurozone's blue-chip index. The positions against Stoxx 50 companies are being made roughly in proportion to their weight within the index.

Among the powerhouses Bridgewater is shorting: Munich-based engineering giant Siemens AG; Airbus SE, the airplane and military-equipment manufacturer; French bank BNP Paribas SA and Dutch bank ING Groep NV; Paris-based entertainment and telecom company Vivendi; drugmaker Sanofi; Nokia OYJ, the Finnish tech firm; and the French oil behemoth Total SA.

Bridgewater's short bets in Europe exceed the dollar value of its disclosed long equities positions in the US by more than $5 billion.

Dalio's economic preconditions to sell, or short, stocks isn't unique to Europe. The US has seen wage gains accelerate as the jobless rate hovers near a 17-year low.

Despite recent fluctuations in the stock market, Federal Reserve Chairman Jerome Powell suggested that the US central bank would continue on the path of gradual interest-rate increases. And this week Dalio identified a rising "risk of a recession in the next 18-24 months."

But Bridgewater's trades in the US remain a mystery. The Eurozone requires that investors disclose their short bets once they pass a certain size. The US does not.