Gundlach Is Quietly Heading For The Exit: "Volatility Is About To Go Up"

DoubleLine Capital’s Jeff Gundlach has become one of the most visible critics of market complacency, revealing his purchase buy five- and eight-month S&P 500 put options. Now, the legendary bond investor is touting his bet on a spike in equity market volatility as one of his “highest conviction” trades, according to an interview with Bloomberg.

"Volatility is about to go up," he said. "That’s my highest-conviction trade right now."

As a result, Gundlach - who does not anticipated a crash (yet) - says his fund is quietly moving toward the exits on riskier assets, which is also his recommendation to traders.

“I don’t see the big drop, unless there’s something out of left field, like some sort of really escalating conflict,” he said. “I think you’re supposed to be gradualistically moving toward the exits.”

Speaking to Erik Shatzker, Gundlach says he’s reducing DoubleLine’s positions in junk bonds and EM debt and moving to safer high-yield credits. With US equities looking increasingly overvalued with each successive all-time high, Gundlach says being defensively positioned is worth sacrificing a few quarters of higher returns.

In the interview, Gundlach echod recent bearish views expressed by investing legend Howard Marks, who said that markets have crossed into “too bullish” territory according to his latest investor letter, discussed here previously.

“If you’re waiting for the catalyst to show itself, you’re going to be selling at a lower price," he said in a phone interview Monday from DoubleLine’s office in Los Angeles. “This is not the time period where you say, ‘I can buy anything and not worry about the risk of it.’ The time to do that was 18 months ago.”

When asked about his business plans, Gundlach revealed that DoubleLine’s AUM increased to an all-time high of $110 billion in 2017.

However, he unlike so many other managers, he has no intention of growing his AUM exponentially, and insisted that he may soon close the fund to new money, adding that he doesn’t want DL to become an industry behemoth like BlackRock or Vanguard.

“Gundlach is taking a similarly conservative approach to building his eight-year-old firm. While some competitors embrace the mantra “size matters,” he believes there’s a limit to how much DoubleLine can manage well and says the firm may stop marketing altogether once assets reach $150 billion, up from about $110 billion today.


‘I’ve actually been turning money away in our institutional business,’ Gundlach said. ‘I don’t want to manage $500 billion. I don’t really want to manage $200 billion.’


That attitude is out of step with an industry that prioritizes asset growth, both as a means to generate more revenue and as a way to defray fixed expenses such as technology and compliance. Janus Capital Group and Aberdeen Asset Management Plc each combined with other firms in part to gain scale. Vanguard Group has more than quadrupled its assets to $4.4 trillion in less than a decade, and in an interview in March, Larry Fink, whose BlackRock Inc. oversees $5.7 trillion, said ‘scale has become a greater necessity - and for us a greater advantage.’”

As a result, Gundlach may soon shut his flagship $50 billion Total Return Fund to new money, saying that continued growth would make it more difficult to invest in some less-liquid high-yield markets.

“Bill Gross once managed a single fund with $293 billion in assets, the Pimco Total Return Fund. By comparison, Gundlach, who co-founded DoubleLine in 2009, said he’s debated whether to close the $54 billion DoubleLine Total Return Bond Fund, the firm’s largest, to new money.”

While many hedge funds are slashing fees in a desperate attempt to attract new capital, Gundlach sees high fees as a way to regulate growth.

“I don’t want one $150 billion fund, I want 10 $15 billion funds. A diversified business,” Gundlach said in the interview. “We lose business because our fees are too high and I say, ‘Fine, that’s a way of regulating growth.’”

Of course, there’s probably no better strategy to ensure that every major institutional investor will show up at your door, check in hand, begging for you to take their money than telling Bloomberg that the door to new money is closing quickly.


MrSteve Tue, 08/08/2017 - 08:05 Permalink

When he's wrong, not much happens- small opportunity costs are incurred. When it happens that he's right, millions will lose trillions and wonder what happened.

lester1 Tue, 08/08/2017 - 08:12 Permalink

Gunlach has been getting slaughtered by the unaudited Federal Reserve's Plunge Protection Team aka PPT. They are buying up the market and beating out these hedge funds who cannot keep up. 

GodHelpAmerica (not verified) Tue, 08/08/2017 - 08:15 Permalink

Not following this positioning Gundlach. Bond volatility will have to go up first sir; because the only thing that will notably shake up central bank supported equity markets--absent a black swan-- is faster than expected int rate increases due to rising inflation, and that will of course hurt bonds more than equities in the short term...

ceilidh_trail Tue, 08/08/2017 - 08:27 Permalink

Sometimes, quality funds really do close. RPMGX would be a good example. I silll regret not having kept my foot in the door on that one. So, putting just enough in his funds to be able to participare later is not such a bad idea. Mostly, cash for me right now is king. I'll take the st opportunity cost. It is better to gain a little less and save a big loss if the tide does turn as it surely will.

goldoverbtc Tue, 08/08/2017 - 08:40 Permalink

A lot of people have been calling for this but volatility has not returned.  I would be long the vix, but I wouldn't be surprised if the gap up doesn't happen for another year.  The fed is in a bind, and we don't know what will happen with the tax cuts.  Once that is more clear the market will have to correct itself. 

Erwin643 Tue, 08/08/2017 - 09:12 Permalink

It took two devaluations of the Chinese Yuan back in 2015 to drop the markets in a big double-bottom (followed by a kinetic strike by the U.S. in retaliation). It would have to be something similar that makes the markets drop again.

Pollygotacracker Tue, 08/08/2017 - 09:23 Permalink

Jeff Gundlach is saying exactly what John Hussman Phd. is saying. Hussman: "Remember that the 'catalysts' often become evident after prices move, not before". Gundlach: "If you're waiting for the catalyst to show itself, you will be selling at a lower price". Taken together, I would be warned.

ratpack1968 Tue, 08/08/2017 - 09:31 Permalink

Gundlach is a smart guy, but what happens from here is anyone's guess.  Markets have not functioned normally since 2009 - unprecedented measures reap unprecedented results.

yerfej Tue, 08/08/2017 - 10:55 Permalink

There is not enough upside to warrent the risk. The collapse will be fast this time and the markets will NOT come back for 20 years as governments try and figure out how to deal with massive debt, unemployables, and stagnation.

DjangoCat Tue, 08/08/2017 - 11:11 Permalink

What's with Whibbersnipper, "access denied" to his user profile and"The comment you are replying to does not exist."when trying to make a reply.  Looks like AI blather, and now the comment has dissappeared.