In the past year, there has been a lot of debate whether Trump's tax plan will make the poor poorer and the rich richer. Well, we now have one glaring example of the latter, and to a degree never seen before, if in a different format than most envisioned: according to Bloomberg, Jeffrey Talpins’s Element Capital Management made more than $3 billion in the last five months, mostly as a result of a trade that President Donald Trump’s tax bill would pass successfully, driving stocks and yields on U.S. Treasuries higher.
Talpins - whom we first profiled back in 2015 when he quietly emerged as a massive buyer of Treasurys - put on the "Trump trade" one year ago when investors still had doubts that a tax bill, or frankly anything proposed by Trump, would succeed. The manager's vision - which was 100% correct - was that Trump and fellow Republicans, having failed to pass major legislation, including an overhaul of Obamacare, would unite to push through a large tax cut for individuals and corporations.
That's exactly what happened, and it's not over yet: the hedge fund macro manager still thinks the trade has some room to run.
“We expect the U.S. equity market to fully recover the peak to trough decline and hit new highs over the next few months,” he said in a mid-February letter to investors seen by Bloomberg. “As the market gradually recovers its February losses, we also expect that volatility will subside commensurately.’’
Talpins first made his tax call in an April 2017 letter to investors, saying a lack of cohesiveness within the Republican Party and the dim prospect of legislative support from Democrats would drive Republicans to “take the path of least resistance” in the form of a large tax cut for companies and lower marginal rates for individuals.
A month later, he told them he had increased his exposure to stocks on the view that a tax package, deregulation, an accommodative Federal Reserve and healthy earnings “all support equity prices moving higher.” In the May letter, he also said that he expects the Fed will raise rates by 25 basis points a quarter this year, and continue to remove accommodation, which has so far been accurate.
Oh, and he was also spot on in predicting that back then that there was a high chance for a 10% correction in the next 12 months that would hit commodity trading advisers and volatility targeting funds hardest, though the market would then recover within a few months.
As stocks climbed for 2017, and yields on Treasuries jumped at the very end of 2017, Talpins’s correct view was rewarded. So was his bank account.
As a result, while most of his peers have languished and scratched their heads how to generate alpha, Elements figured it out: have trust in Trump... and be rewarded. This year its fund has already climbed 11.5%, following a 9% return in the last quarter of 2017 fueling the multibillion-dollar gain. The tax call was the latest correct call for the $13.5 billion Element, which was launched in 2005 after Talpins' stints at Goldman and Citigroup. Incidentally, less than 3 years ago, Elements had less than half in AUM, or roughly $6 billion.
Unfamiliar with Talpins? Here is some detail from our 2015 profile of Element, and the formerly unknown hedge fund manager:
"Mr. Talpins is an intense and reserved trader formerly at Citigroup Inc. and Goldman Sachs Group Inc. He is known for a tenacious style that can grate on rivals and once tested the patience of former Federal Reserve Chairman Ben Bernanke."
According to the NYT, in 2005, Trader Monthly named Mr. Talpins one of the top 30 traders under 30, when he was still an employee of Vega Asset management. "Youth is not wasted on this crop, any of whom could be a billionaire by 40,” the magazine said. “Or, then again, they could be belly up and bust."
Back in 2010 the FT profiled Element Capital, then at just $1.5 billion, saying that fixed-income relative value trading, "the hedge fund strategy pioneered – and made notorious – by Long Term Capital Management is returning to prominence amid one of its most successful years yet." It added that "fixed-income relative value trading – shunned by investors after the collapse of LTCM in 1998 – has been one of the industry’s few outperformers this year, thanks to massive pricing anomalies caused by fiscal stimulus packages and unconventional central bank monetary policies around the world."
In any case, Talpins also posted double-digit returns in 2015 and 2016, while other macro traders including Ray Dalio, Paul Tudor Jones and Louis Bacon lost money or made only a few percent. His fund has posted annualized returns of 21% since inception.
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Now for the not so good news: Talpins warns that he isn’t a long-term bull.
In his latest letter, Talpins said that the increased volatility in February was initially caused by pension funds rebalancing their portfolios at the end of January by selling about $50 billion worth of stocks. That pushed stocks lower and caused CTAs, volatility targeting funds and short volatility products to dump an additional $200 billion in stocks. The firm, known for its heavy use of options in its wagers, used baskets of single-name equities as well as call options on the S&P 500 to make the bets. As a hedge, it shorted stock indexes outside the U.S.
He also warned that the S&P 500 is about 3% below its January peak, and once stocks surpass that point, rising interest rates, stretched valuations and a maturing economic cycle will start weighing on the market later in the year.
In other words, enjoy the next 3-4 months: that's about as good as it will get.
Oh, and for those who can't wait to have Talpins manage their money, get in line: the fund has been closed to new investments since last year, when it pulled in $2 billion of fresh capital in two weeks.