Bridgwater bought some puts. Sell it all!
In news that’s sure to serve as fodder for doomsayers and various purveyors of financial agitprop, Bridgewater is betting the S&P, the Euro Stoxx 50, or both, will decline by March.
The options are tied to some $100 billion worth of the indices. Both are, of course, up sharply in 2019. In fact, the Euro Stoxx is headed for one of its best years in decades.
The bets were made over months, and executed via Goldman and Morgan, among others.
Obviously, this could be a hedge against existing exposure and the Wall Street Journal‘s sources don’t know why Bridgewater took the position. Some will invariably make a connection with Elizabeth Warren. The Iowa caucuses are on February 3 and voters in 18 states will have voted by March 3.
(Goldman)
Bridgewater said it has no positions that are designed to hedge (or otherwise bet on) any political outcomes in the US. The firm also said it would be “a mistake” to put too much emphasis on any one position they hold, given that many positions are, in fact, hedges and are subject to change.
Still, market participants will point to Ray Dalio’s incessant hand-wringing about the fractious political environment in the US, a country he’s variously billed as having reached something of a make-or-break situation, with capitalists and socialists vying for votes.
Dalio has also warned recently about the prospects for “capital wars” between the US and China and is generally perturbed by what he sees as numerous parallels with the 1930s.
More: Watch Ray Dalio Talk Possible ‘Capital War’ Between US, China
Goldman and Morgan will need to hedge their exposure to Bridgewater’s positions. It’s worth noting that Goldman recently talked up “strong entry point[s] for optionality” and suggested clients “consider stock replacement and hedging”, both on the S&P and the Euro Stoxx 50.
“Over the past three years, cutting equity risk via 1-month 25-delta puts has outperformed cutting an equivalent amount of delta-one risk, and the last few weeks have added to that outperformance because of the extra equity long exposure”, a November 12 note reads. “By similar logic, stock replacement is attractive, particularly in Europe where implied volatility is near 2017 lows”, Goldman continued, on the way to recommending “buying E-Stoxx 50 calls to replace long equity exposure”.
In the same piece, Goldman noted “demand for protection around next year’s elections led to some key 2020 expirations (Friday 6-Mar, October monthly, November monthly) being listed earlier than they otherwise would have been, which makes it easier to track the option market’s pricing of these events”.
In August, reports indicated that Bridgewater’s Pure Alpha fund was down 6% YTD thanks to bearish bets on global rates at a time when bond yields had tumbled to record lows. Pure Alpha II, a version that employs more leverage, was down 9% at the time, according to sources.
Additional reporting late last month suggested the firm hadn’t yet recouped the losses.
