- Getty Images/ Kevork Djansezian
An iconic hedge fund manager says investors are misperceiving risks in the markets – at a time when markets are hitting historic highs.
Baupost Group’s Seth Klarman laid out his concerns in April in a client letter, a copy of which was reviewed by Business Insider.
Risk, Klarman wrote, is the most important consideration when investing, and investors are being too trusting.
To make his point, Klarman contrasted today with the start of the financial crisis.
“When share prices are low, as they were in the fall of 2008 into early 2009, actual risk is usually quite muted while perception of risk is very high,” Klarman wrote. “By contrast, when securities prices are high, as they are today, the perception of risk is muted, but the risks to investors are quite elevated.”
Klarman oversees one of the US’s largest hedge fund firms, with some $30 billion under management. He has a huge following on Wall Street – investors named his book, “Margin of Safety,” their favorite investment book in a recent SumZero survey. A used copy on Amazon costs more than $900.
He is no stranger to raising concerns on the markets under President Donald Trump. Earlier this year, he laid out his worries in a separate investor letter, raising red flags about Trump’s proposed tax cuts, for instance, which could considerably raise the government’s deficit.
Markets have rallied since Trump was elected in November, as Wall Street expressed confidence in the president’s plans to cut taxes, roll back regulations, and boost infrastructure spending. Even as the Trump administration faces notable headwinds – investigations into Russia’s influence on the election, flubs in passing healthcare reform – the markets don’t seem to care.
There could be several reasons for that. In Klarman’s more recent letter, he flagged three forces that investors are regularly combatting:
- Greed and fear, which “pressure investors to do the wrong thing at every turn.” “Aggressive brokers, investment bankers, and traders who routinely promise more than they can deliver.” Investors focusing on the short term and trend following, and restrictions that are supposed to limit risk but prevent outperformance.
As for potentially missing the Trump rally by continuing to hedge and focus on the long term?
“We truly don’t care,” Klarman wrote. “We’re not going to fall into the trap of trying to outsmart others with clever short-term trading.”
Baupost managed $30.3 billion at the start of the year, according to Hedge Fund Intelligence’s Billion Dollar Club ranking. A spokeswoman for the firm declined to comment.