On Friday we reported that as it was quietly building out its mega bearish bet, the world's biggest hedge fund, Bridgewater Associates, unveiled its biggest short position yet: a $14+ billion, and growing, thematic basket of European corporate shorts which includes such iconic names as Airbus, Total, Enel, Siemens as well as Europe's biggest banks Deutsche Bank, BNP Paribas, Intessa, ING and Banco Santander.
This morning, in its Live Markets blog Reuters picked up on this theme and highlighted that although the immediate stock market reaction hasn't been huge, traders are starting to digest the news of Bridgewater's short bets and interpret them as a broader wager on market stress.
As Reuters' Helen Reid writes, Bridgewater "may be so bearish that they expect a stock market disaster, says an equity sales trader at a big European bank." That said, one alternative explanation for these big bets against German names could be a super-bullish position on the euro, which would imply problems for exporters. The trader also warned against taking the position of a single asset manager as gospel, however, saying "they're not Buffett".
Other theories abound, with a third source suggesting that the range of positions is so broad that it's difficult to find a rationale to it "and it may just be a bet on fund flows."
Incidentally, this may address another question that has emerged: why Bridgewater has no shorts on the UK market.
According to data provided to the UK regulator, there are no short-positions taken against blue-chip British companies by Bridgewater, as opposed to German corporate titans. According to EU regulations, short positions bigger than 0.5 percent of the capital of an issuer must be disclosed to the bourse's watchdog (link).
Perhaps Dalio refuses to short the UK as the market is already very underowned, with little potential selling pressure.
As for why Dalio is short those particular EU names in particular, a trader told Reuters that they're quite high beta, meaning they are highly sensitive to market moves. "It seems they clearly see the DAX / market a lot lower."
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Meanwhile as Dalio continues to build his European short, he has been buying gold. According to the fund's latest 13F Bridegwater boosted its holdings in the two largest gold-backed ETFs last quarter before prices of the metal capped the biggest annual gain in seven years.
As of Dec. 31, Bridgewater raised its stake in SPDR Gold Shares and iShares Gold Trust, its latest 13F revealed. Assets in exchange-traded funds backed by gold rose for a fourth straight quarter in December, the longest expansion since 2012.
As Bloomberg reminds us, in August, Dalio recommended investors consider placing 5 percent to 10 percent of their assets in gold, citing political and economic risks. By the end of December, Bridgewater raised its stake in SPDR Gold Shares by 14,091 shares to 3.91 million shares, the filing showed. Its stake in iShares Gold rose by 34,792 shares to 11.3 million shares, according to the filing.
As a reminder, on Monday morning in a linkedin blog post, Dalio appeared to dramatically reverse his outlook and changed his perspective on the economy, saying that much had changed in the past 10 days, suggesting that the economy is far further down the business cycle than he had assumed previously. Of course, the cycle ends with a recession and a market crash, and that's Dalio appears to be hedging against with every passing day.