In the two years preceding the financial crash of 2008, a small group of investors bet against the US mortgage market, pre-empting an imminent collapse.
Fifteen years later, American billionaire Ray Dalio’s firm Bridgewater Associates LP, which Fortune pegged to be the largest hedge fund in the world, has bet £6.7 billion on losses in the Eurozone.
During the period of hedging against subprime from 2006 to 2007, which became the subject of the film The Big Short, a number of investors spotted that banks were reselling poor quality “subprime” mortgage loans which were unlikely to be paid back.
These risky loans, issued when the market was dishing out 100% debt mortgages often without requiring buyers to pay deposits upfront, were lumped together with other less risky debt, creating a dangerous cocktail for disaster.
Now, both Europe and the US, grappling with record levels of inflation following the Covid-19 pandemic and an energy crisis exacerbated by Russia’s war on Ukraine, have engaged in monetary tightening measures such as emergency bond-buying and interest rate rises in an attempt to combat wider price rises.
The US is already in a bear market, indicated by a more than 20% drop in the value of the S&P 500 in the past six months, and Europe too is now heading into a bearish trend.
Dalio, who founded Bridgewater from his New York apartment in 1975—which now has a head office in Connecticut—is shorting European stocks at pace. According to data analysis firm Breakout Point, the hedge fund disclosed 17 new short positions by the middle of this week in European companies.
The total estimated value of Dalio’s short position in Europe was €5.2bn, as of Wednesday, the analysis firm estimates.
“We captured 17 new big shorts out of which seven are in Germany, five in France, two in the Netherlands, two in Spain, one in Italy,” Breakout Point said. “We estimated more than €5.2bn of worth in these short bets, as of Wednesday close.”
These cumulative short positions include bets against stalwarts of the financial and energy industries in Europe such as Allianz SE (OTC:ALIZF), TotalEnergies and BNP Paribas.
One of the biggest short positions that Dalio has taken in Europe is a €1bn bet against ASML Holding NV (NASDAQ:ASML), a company with a market capitalisation of €194bn, which provides lithography printing for microchips and semiconductors.
Bridgewater has also shorted about €700mln of oil and biofuel producer TotalEnergies' stock and €390mln of German insurer Allianz’s shares.
In the energy sector, the hedge fund is also betting against French smart meter and energy management company Schneider Electric and German chemicals company BASF, which supplies products to oil fields and gas treatment agents to the gas industry.
“The fact that all these shorts appeared within few days indicates index-related activity,” said data provider Breakout Point. “When it comes to magnitude of short selling, we don't recall any other money manager coming close to this, except for Bridgewater itself.”
All of the shorted companies are part of the STOXX Europe 50 Index, Europe’s premium listing. The index has only contracted 6.9% in the last six months, which represents a bearish trend but is not anywhere close to officially being a bear market.
Bridgewater has since disclosed three new short positions in Germany in software company SAP, Siemens and Adidas AG (OTCQX:ADDYY), according to the German regulator. Its short position of 0.52% in German retailer Adidas is worth an estimated €165mln, based on its market capitalisation of €31.79bn.
Bridgewater, which usually positions itself to bet against corporate bonds during slowdowns in the US and Europe, may hold an even greater short position in European stocks than reported. This is because a short would have to represent 0.5% of a company’s stock in order to be disclosed.
Analysis firm Breakout Point noted that Bridgewater previously went on the short-selling rampage in early 2018 and again during the emerging Covid-19 crisis in the first quarter of 2020.
At that time the hedge fund disclosed more than 40 short positions in European companies. In March 2020, the researcher said Bridgewater had disclosed more than €14bn of short positions in at least 43 European companies.