Last October, the financial world was caught by surprise when it emerged that Ray Dalio's Bridgewater, traditionally bullish, had amassed a sizable $713 million short against Italian financial stocks, its biggest disclosed bearish bet in Europe.
In addition to shorting five banks and one insurer, public filings disclosed that the $160 billion hedge fund was also betting on a decline in the stock price of Milan-based Prysmian SpA, the world’s largest cable maker, as well as shorting Italian mega banks Intesa Sanpaolo and UniCredit as well as insurer Assicurazioni Generali, all names very familiar to anyone who covered the endless European crisis from 2010 until the launch of QE by the ECB, and which were constantly on the verge of collapse.
Fast forward to today when just one month before Italy's elections - which the broader market stubbornly refuses to acknowledge are a risk factor - Bridgewater has tripled down on its bearish bets against Italian banks and insurers, making the position the largest short carried by the world's biggest hedge fund in years, if not ever.
According to Bloomberg, the world’s largest hedge-fund tripled its bearish wagers against Italian companies in the last three months, mainly focused on the financial sector. The March 4 election is widely expected to produce no clear winner, which would create difficulties in forming a government and make it hard for the country to produce the wide-ranging economic reforms that investors and the European Union are looking for.
Bridgewater boosted its bearish bets against Italian companies to $3 billion and 18 firms, up from $713 million in early October. The investment firm’s positions against European companies as a whole total $3.3 billion and 20 names. The growing short comes just days after Dalio told a Davos audience that holding cash is now stupid.
The Westport hedge fund also disclosed a short position in transport-infrastructure provider Atlantia Tuesday and added to its largest short bet, against lender Intesa Sanpaolo SpA, in recent days.
The catalyst: Italy's March 4 elections when voters in eurozone’s third-largest economy will head to the polls amid dwindling support for the ruling pro-EU centre-left Democratic party and rising support for the Eurosceptic opposition
While an Italexit is unlikely should the Eurosceptics win, Luigi Di Maio, leader of Italy’s anti-establishment Five Star Movement, wants to make it easier for the country’s ailing banks to recover assets, allowing them to maximize their returns. Italian banks have more than 270 billion euros ($336 billion) of non-performing loans, the most of any European nation.
Is it time to get nervous? As Bloomberg concludes, Bridgewater has seen mixed results from its bets as thirteen of its 20 shorts have lost money, with the shares rising over the last three months.
Then again, this time may be different, especially after it emerged at the end of 2017 that the only buyer of Italian sovereign bonds had been the ECB. Now that the ECB is tapering, it is unclear who else may want to buy the Italian "hot grenade" especially if the buyer of last resort is no longer there starting in late 2018 when the ECB's QE gradually tapers to zero.