Baupost Q2 Letter

Baupost Letter Points To Concern Over Risk Parity, Systematic Strategies During Crisis

The whisper topic that is getting much discussion is what the next market crisis will look like? While predicting market volatility – which by definition is driven by surprise – is a low win percentage endeavor, only suited for the bold investor, there are a few lines in the recent Q2 2017 Baupost Letter to investors that might provide some clues.
 Q2 2017 Baupost Letter - Talk is increasing regarding about a market price re-adjustment
When author and market analyst Jim Rickards noted sophisticated investors are increasingly engaging in discussions of what the next market crash might look like, this discussion is taking place in verbal conversations at non-public events, but the discussions take place in public. The problem is, they are just difficult to decipher.

“The elites communicate in an intentionally boring style with lots of technical jargon and publish in channels non-experts have never heard of and are unlikely to find,” he recently wrote.

While the private investor letters received by ValueWalk are not an appropriate sample size to make statistically valid conclusions, it is clear the number of major fund managers over the past year has increased their speculation regarding a market sell-off. Add Baupost’s recently named President and Head of Public Investments Jim Mooney.

While Mooney’s (and Seth Klarman's) warning regarding market volatility is not new, perhaps the more interesting features of the next market sell-off were put on display in his market level.

Q2 2017 Baupost Letter - Market structure differences between the 2008 crash and now
There are a few primary market structure differences between current times and the 2008 market crash, and these differences could lead to an exacerbation of a stock market price readjustment.

Perhaps the most evident differential is the sheer volume of money placed in algorithmic-based strategies that are programmed to sell as the stock market declines or interest rates rise rapidly.

“Although it is impossible to calculate with precision, the volume of assets whose performance is, in some manner, linked to volatility likely runs in the hundreds of billions of dollars,” Mooney wrote in the 2q Q2 2017 Baupost Letter, pointing to a new historical benchmark.


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