Markets are ripping past all-time highs after Donald Trump's electoral victory. Doomsday investors aren't convinced.
ANGELA WEISS/AFP
- Hedge fund managers who do best in choppy markets are not convinced by the post-election euphoria.
- These managers, like $16 billion firm Universa Investments, believe warning signs are flashing.
- One datapoint that markets are at a peak: Warren Buffett is holding more cash than ever.
The first Donald Trump administration included policy announcements via Twitter, a pandemic, and protectionist tariffs that agitated the country's largest trade partner.
His second term could be even more "radical" for markets, according to Jonathan Webb, an executive at portfolio technology company C8 Technologies and the former head of FX strategy at Jefferies.
"The backdrop is already a more volatile FX market," Webb said, comparing markets to when Trump was inaugurated the first time in January 2017. Higher interest rates, struggling European economies, and global inflation have created a more volatile world regardless of who won the election.
"Throwing Trump in, even moreso," Webb said.
For managers that trade volatility and hedge against market crashes, these types of conditions are normally when their strategies come into play. But market volatility is at its lowest levels since July, according to the VIX, Wall Street's favorite measure of uneasiness. Assets from US stocks to bitcoin are hitting all-time highs despite the economic backdrop — the Federal Reserve cut rates in September, indicating a slowing economy — being far from ideal.
"When people think things can't go down, that's when you start to worry," said Brandon Yarckin, the chief operating officer of $16 billion tail-risk asset manager Universa Investments, in an interview with Business Insider. He pointed out that billionaire Warren Buffett's Berkshire Hathaway is sitting on more cash than ever before — a sign that the Oracle of Omaha thinks markets are overvalued.
"There's a lot of kindling for a crash out there," Yarckin said.
The euphoria and fear of missing out on the rally means investors are not knocking down the door of those who thrive in chaotic conditions. Universa has demand for its strategy currently, Yarckin said, but it's coming from "a small subset of people."
Simon Aninat, a volatility portfolio manager for Natixis affiliate Ostrum, said clients haven't asked to revive a long-volatility strategy that performed well during the early days of the pandemic, but was closed in mid-2023 due to a lack of demand. Firms such as Universa soared during COVID — the Mark Spitznagel-led strategy returned more than 4,000% in the first quarter of 2020, for example.
"We know there's going to be bumps in the road during a Trump administration, but it's hard to be sure that there'll be a big spike of the VIX above 40," Aninant said. Instead, clients are more interested in the firm's short-volatility fund, which does well when markets stay calm.
It's "counterintuitive," Aninant said, given Trump's management style, but clients believe the President-elect's policies mean "the S&P will continue to rise."
Allocators should be looking for "not necessarily spicy but uncorrelated strategies," said Mattias Eriksson, a former BlueCrest partner who cofounded C8 Technologies in 2017.
"He was tweeting a lot back then, and he created a lot of intraday volatility within the market," Eriksson said, referring to Trump's first term.
Now, Eriksson's colleague Webb said, there's the potential for even more out-of-the-box policies given the presence of people like Tesla CEO Elon Musk in Trump's orbit, and the fact Trump does not have to worry about reelection.
"I wonder if this is being underestimated" by the markets, Webb said.
"It's certainly an experiment."