With $32.6 million under management, Elliott Management is a hedge fund with a track record of understanding the “hedge” component of their category definition. As he looks over today’s market situation and sees discomforting similarities with 2008, he readies for a repeat of history and starts to build dry powder. The fund’s ability to successfully hedge is a significant part of its success – as evidenced by raising $5 billion in one day recently. The skills of navigating through markets on the brink of danger – and then profiting in the wake of trouble – is what Elliott is about, a valuable asset management trait that Paul Singer thinks is about to get tested again.

Singer is not only hedged for this environment, a March 31 letter to investors reviewed by ValueWalk shows, but he is prepared for the aftermath of another significant market price adjustment.

Paul Singer at the Davos conference By World Economic Forum (Flickr: The Global Financial Context: Paul Singer) [CC BY-SA 2.0], via Wikimedia Commons

Elliott Management – Hedging is what a “hedge” fund is all about

When he looks at the reasons for his investment success, Singer credits the firm’s ability to hedge risk at the top the list.

Make no mistake. Hedging risk and delivering strong investment returns is not easy, particularly as “hedging creates a significant headwind to profitability,” Singer noted.

In fact, the hedger is not often the celebrated market hero in the mainstream. When great investing legends are considered, it is often on the basis of their oversized returns in a given year that is a testament to their prowess. However, certain professional allocators know it is consistency and the ability to retain capital during market crisis that are truly unique skills.

We could be in just such a market environment, Elliott observes.

Paul Singer – We live in an extraordinary time, and not in a good way, Singer notes

We live in “a time when extraordinary worldwide monetary policies have created bubble after bubble,” the legendary fund manager with only two losing years in his long history wrote. Sounding a familiar theme, he pointed to quantitative magic being used instead of addressing fundamental issues, and the rising sovereign and private debt load as issues that will come back to haunt.

Singer looks at the aftermath of the 2008 global financial crisis (GFC) and not only thinks the mess hasn’t been cleaned up, but the exact wrong measures have been used to address the problem.

“Since the GFC, we have believed that the extreme monetary policy (ZIRP, NIRP, and QE) prevalent throughout the developed world was unsustainable and risky,” he says. The solution to a crisis in financial engineering isn’t more financial engineering, but fundamental reflection and addressing the real issues that caused the problem, wherever that trail leads. “The solution to over-indebtedness should not have been the creation of more debt, and the problem of inadequate growth should not have been solved by money-printing and ZIRP/NIRP.”

When the average investor looks at the world, all they see is a placid market were asset prices rise in value regardless of the harrowing market event. North Korea increasingly provokes its Asian neighbors and defies US President Donald Trump, the markets move higher. After moving higher on hopes of a Trump legislative agenda, when such hopes are dashed, stocks dash higher. When in Europe for G20 and G7 meetings, Trump hints he may not support Article 7 of the NATO Treaty that calls for defense of allied nations during attack, the market breaks into new highs. What’s next? The Iranians launching a nuclear attack on their neighbors lifting the S&P 500 past the 3000 level?

In the face of what normally might be negative market moving events leading to higher asset prices, an odd market environment of tranquility has been manufactured.

“On the face of it, year after year of the unusual and risky policy mix has not caused the collapse of any major currencies or significant inflation (other than in asset prices),” Singer noted, pointing to a world put to sleep. “This seeming lack of empirical proof of the lurking danger has lulled most investors into thinking that the elevated prices of stocks and bonds, and the historical fall in price volatility in financial asset markets, is somehow a permanent condition.“

Today’s market environment that has the mainstream asleep is one in which Elliott thinks “the trick in such periods is to keep out of trouble.” Eventually the markets wake up, and when they do, investors with blinders on will suffer. For this, Singer says he is prepared.