Nov 13/15 – Are you fading me?

2015-11-13 2pm EDT  |  #AUD #Bridgewater #BRL #EEM #MXN #SPY

Yesterday the world’s largest hedge fund posted their third quarter 13F filing. Due to security regulations, Bridgewater Associates has to divulge their US stock holdings on a quarterly basis, and market participants often study Bridgewater’s (and other large hedge funds’) portfolio changes with keen interest.

Since this summer’s equity market rout was blamed on risk parity strategies, this Bridgewater filing is being especially closely scrutinized.

It is no surprise that Bridgewater was a big seller during the third quarter. But the position they puked out the most seems to be emerging market equities. According to Bloomberg:

Bridgewater Cut 41% of Emerging-Market Stock ETF Holdings (1)

2015-11-12 18:25:47.434 GMT

By Katherine Burton and Ye Xie

(Bloomberg) — Bridgewater Associates, once the biggest investor in the world’s two largest emerging-market exchange-traded funds, sold 41 percent of its holdings in the third quarter amid a rout in developing-nation assets.

The firm, led by Ray Dalio, cut its investments in Vanguard Group Inc. and BlackRock Inc.’s ETFs to a combined 104 million shares, from 175 million in the previous three-month period, according to a form 13F filed Thursday. The value of the ETF holdings dropped more than 50 percent to $3.4 billion as a result of share price declines and the divestments.

Many market pundits are viewing this as terrible news for emerging market equities. Bridgewater are smart guys, so surely their selling means the average Joe should also be pulling the rip cord.

I couldn’t disagree more…

Bridgewater is a monster hedge fund that takes weeks and sometimes months to exit positions. By the time they are reporting their portfolio changes in the 13F filings, they have already moved the market. To make a sale because a month ago Bridgewater was selling is ridiculous.

If anything you want to be thinking about taking the other side of their trade. The fact that Bridgewater is no longer overhanging the market with their trigger finger volatility based strategies is a positive for returns going forward, not the other way round. Most of these hedge funds are not the friend of the long term investor. And from a short term perspective, when they demand liquidity, they can often push assets down to levels that make a lot of sense to fade…

I know emerging market equities are about as popular as baggy khakis and Celine Dion records, but the continued selling just makes them all the more appealing for an investor with a time horizon past month end marking.

The recent rally in the S&P 500 has not been followed with a rise in emerging markets equities.

The face ripping rally in spooz has been contrasted with a big slump in emerging markets. The spread between the two assets has blown out to previous wides:

Emerging market equities are particularly sensitive to US dollar strength. So it is no surprise they have been stinking up the joint as the US dollar has rallied off the Fed’s increasingly hawkish chatter.

But the interesting development is that even though the US dollar has rallied back to previous highs, emerging market equities are hanging in there.

The last time the US dollar was at this level, emerging market equities were much lower.

Obviously much more goes into pricing EEM than the level of the US dollar, but I have to wonder – what if the selling is all done?

There is every reason for emerging market equities to be much lower, but they are actually behaving decently.

And when you examine currencies that are more sensitive to emerging market economies, there is a definite trend. They have stopped going down. Have a look at the Australian Dollar:

Or the Brazilian Real:

And even the Mexican Peso looks decent:

The US dollar strength seems to be concentrated against other developed nations that are not tied as much to emerging markets (for example the Euro).

It is difficult to take the other side of the world’s largest hedge fund, but someone has to… I am continuing to pick away at emerging market equities down here.

Thanks for reading and have a great wk-end,

Kevin Muir

the MacroTourist