Going bullish on gold in yuan terms and betting against global equities currently explains three-quarters of the hedge fund’s strategy.
While the firm uses the MSCI World Index in models to visualise the trade, it goes a bit deeper with its short position [bet against the index], selecting individual stocks and exchange-traded funds to bet against.
Among the warning signs, Crescat cites corporate insiders who are currently selling stocks hand over fist — indicating a potential stock bubble burst.
In early 2017, those investors heavily sold shares while the S&P 500 continued climbing. That happened again in 2018. With the smart money selling once again, “the third time should be the charm for the stubborn US market,” Crescat wrote to clients over the weekend.
US economic data is deteriorating and inversions remain across the Treasury yield curve, the hedge fund pointed out. Measuring multiple yield spreads across the curve from Fed Funds to 30-year Treasury bonds, Crescat found that almost 45 per cent of the curve is inverted.
“The last two times the credit markets had such a high distortion, asset bubbles began to fall apart shortly thereafter,” Crescat wrote.
Soon the buy-the-dip mentality and bull-market greed will turn to fear. Selling will beget more selling. That’s how bear markets work
As for the almost 13 per cent rebound in global stocks in 2019, Costa said the firm has a high conviction it’s simply a bear-market rally. Just about everything has bounced since the start of the year, accompanied by an abrupt decline in the Cboe Volatility Index, or the VIX, known also as the risk index — signs reminiscent of head fakes in such advances.
“Soon the buy-the-dip mentality and bull-market greed will turn to fear. Selling will beget more selling. That’s how bear markets work,” Crescat wrote.
“There is so much more ahead to profit from the short side of the market. The bear-market rally is running out of steam!”
The firm’s Global Macro Fund has posted an annualised return of near 12 per cent since it was created in 2006, according to its website — greater than the S&P 500’s 8 per cent. Crescat’s Long/Short and Large Cap funds have also outperformed.
“We’re not perma-bears by any means,” Costa said. “This is a very tactical bearish view right now, and hopefully when the market turns, we want to also time the bull market at some point.”