Visualizing How Billionaire Investors Hedge Against Geopolitical Black Swans

Investors must always be comfortable with the idea that the market bears risk.

Sometimes this risk flies under the radar and isn’t as pronounced as it probably should be. However, as Visual Capitalists"s Jeff Desjardins notes, in other cases, the topic of risk can catapult to the forefront of discussion. There can be specific events or signals unfolding that give investors the jitters – and during these times, investors will make adjustments to their portfolios to avoid getting caught off guard.

HOW BILLIONAIRES ARE HEDGING

In the following infographic from Sprott Physical Bullion Trusts, we explain the particular geopolitical risks that have the world’s most elite investors concerned today – and what moves they are making to protect themselves from black swans.

Courtesy of: Visual Capitalist

The world isn’t predictable at the best of times – but after unanticipated occurrences such as Brexit and the election of Trump in 2016, the geopolitical tea leaves are getting even more difficult to read.

The world is approaching a major inflection point and the intense amount of global angst we’re experiencing now stems from deep, structural forces that have been building over decades.

– Reva Goujon, VP Global Analysis of Stratfor

According to Reva Goujon, VP Global Analysis of Stratfor, we are experiencing the perfect storm of “-isms”: nationalism, nativism, protectionism, and isolationism.

As a result, the following potential geopolitical risks are at the top of the agenda for experts and top investors:

Domestic risks:
Unpredictability of the Trump administration, government inaction, a trade war with China, and NAFTA renegotiations

 

International risks:
Economic nationalism, further “exits” from the EU, Russia and China seeking to assert authority, terrorism, escalation of Middle East conflicts, and North Korea’s nuclear ambitions

ELITE INVESTORS TAKING ACTION

With these risks perceived to be on the table, some of the world’s most elite investors like Ray Dalio and Warren Buffett are taking action. Here’s what they are up to:

Ray Dalio

Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates, had this to say:

When it comes to assessing political matters we are very humble.

-Ray Dalio, Aug 2017

Dalio’s advice: to stay liquid, stay diversified, and not be overly exposed to any particular economic outcomes. He also recommends a 5%-10% position in gold.

Warren Buffett

The Oracle of Omaha has a similar but very different perspective.

No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media.

– Warren Buffett, Feb 2017

With this in mind and with equities expensive, the seasoned value investor holds onto piles of cash to prepare for potential buying opportunities. Berkshire Hathaway now has $99.7 billion in undeployed cash, the most in the company’s history.

Bill Ackman

Billionaire hedge fund manager Bill Ackman took a position in “out of the money” call options on the VIX.

This will protect against stock market risk.

– Bill Ackman, Aug 2017

David Einhorn

The billionaire founder of Greenlight Capital says he is keeping gold as a top position.

The (Trump) administration comes with a high degree of uncertainty.

– David Einhorn, Feb 2017

Howard Marks

Lastly, the famous value investor Howard Marks warned his clients to move into lower-risk investments to protect against future losses.

The uncertainties are unusual in terms of number, scale and insolubility in areas including secular economic growth; the impact of central banks; interest rates and inflation; political dysfunction; geopolitical trouble spots; and the long-term impact of technology.

– Howard Marks, July 2017

 

Bill Ackman: "I’m Only Second To Donald Trump In Terms Of Clicks On The Internet"

There are several delightful tidbits in this weekend"s FT interview with ADP CEO Carlos Rodriguez, who has been engaged in a bitter proxy fight with activist investor Bill ackman. For those who are familiar with the Pershing Square head, it will come as no surprise that he has long harbored megalomaniac tendencies. For everyone else, the following segment should be quite eye-opening.

As ADP chief executive Carlos Rodriguez recalls it, activist investor Bill Ackman told him he should step down the first time he spoke to him. The second time, he warned him there would be a public fight. 

 

“He said: I know you don’t like the media, but I do and I’m really good at it,” Mr Rodriguez said. “And if this gets into a public battle, it’s going to be bad for you personally, it’s going to be bad for the company, but I’m fine with it because — and he said this — I’m told that I’m only second to Donald Trump in terms of number of clicks on the internet, and hence you will lose if there’s a public relations battle.”

It"s not clear what "clicks" Ackman was referring to: his official twitter account has 13.9K followers, and Ackman has tweeted a total of 9 times since joining Twitter this June. Perhaps Ackman has an inside look into google searches but we doubt that this is the smoking gun.

It gets better:

The fund manager also sought an extension of time from the board to nominate directors because he was going on holiday and needed more time to finish his presentation.  According to Mr Rodriguez, Mr Ackman told him: “I can’t change my vacation plans. And by the way, even if I wasn’t going on vacation, my presentation isn’t ready. I haven’t finished the work,” he recalled.

 

“And I’m like: Well, OK. I’ll relay that back to the board.”

 

“The board had a discussion. The board said: Why in the world . . . and everyone’s scratching their heads like: Why would we grant an extension?” Mr Rodriguez said. “He’s had plenty of time. He’s had a whole year.”

We can therefore commiserate with Rodriguez" summary of his Ackman interactions as "surreal"

Mr Rodriguez, who had never dealt with an activist campaign before Mr Ackman launched a proxy fight to win three seats on the board of the US HR and payroll processing company he runs, recounted in an interview the conversations that began in August this year, calling them “surreal”.

Perhaps the pressure finally got to bill - the stakes are certainly high: "Pershing Square has invested about 25 per cent of its funds in ADP, making the company its largest investment. The fund says that ADP can boost its profit margins by improving software and services, reducing operating costs and becoming more efficient."

In any case, as the FT adds, "Ackman disputes Mr Rodriguez’s recollection of their conversations, and has publicly said he is willing to work with the ADP chief executive. "It’s disappointing that ADP continues to attack the messenger instead of addressing the important questions we have raised about ADP’s operational underperformance and its deteriorating competitive position.""

As for attacking the messenger, there"s plenty to go around:

Mr Rodriguez is also critical of Mr Ackman’s record: after finishing 2016 down 9.6 per cent and 2015 down 16.2 per cent, his main fund is flat this year, though in 2014, he was up 36.9 per cent. In March this year, he apologised to investors over his disastrous investment in Valeant, which lost his funds about $4bn. 

 

“Unfortunately, what he has left is destruction and chaos in his wake on a number of other companies that did not work out,” Mr Rodriguez said.

Read the full interview here.

Bill Ackman Joins Twitter

After years of purportedly cultivating relationships with journalists to burnish his image in the press, Pershing Square Capital Founder Bill Ackman has created a twitter account, presumably to cut out the middleman and speak directly to the people, after eating a series of embarrassing losses from bad bets on Valeant pharmaceuticals and Herbalife Inc.

Ackman confirmed to Bloomberg that the account, which bears the handle @BillAckman1, is, in fact, genuine. Unfortunately, his reluctance to join the service – which was launched 10 years ago – at an earlier date left him unable to secure a handle using just his own name: That handle, apparently, belongs to an imposter.

Ackman forced to use @billackman1

— zerohedge (@zerohedge) June 29, 2017

Ackman’s fund ate a $3 billion loss in March when it announced it had liquidated its entire stake in Valeant Pharmaceuticals and has effectively resigned from the board, saying he won"t stand for re-election. In a statement, Ackman said "it was time to get out of the position, investment required disproportionately large amount of time and resources."

Ackman hasn’t yet tweeted, nor has he added profile picture.

Here’s a breakdown of the accounts Ackman is following, via BBG:

• Ackman was following 46 accounts on Thursday morning, including President Donald Trump’s @Potus and @realDonaldTrump accounts, and Lin-Manuel Miranda, the creator of the hit Broadway musical “Hamilton”


• Following Anthony Scaramucci, PIMCO, GS CEO Lloyd Blankfein


• Also following Larry Summers, Mohamed El-Erian, Ben Bernanke


• Follows French President Emmanuel Macron, ex-U.K. Prime Minister David Cameron


• Follows Jeff Bezos, Elon Musk, Tim Cook


• Also follows tennis stars Roger Federer and Frances Tiafoe

Which begs the question: Where’s our follow-back, Bill?