BOSTON Billionaire money manager Seth Klarman, whose Baupost Group hedge fund ranks among the world's largest and closely watched, warned that U.S. President Donald Trump is creating considerable uncertainty that will translate into risk for investors.
Klarman, whose letters are some of the most widely read in the investment industry, also announced a key organizational change.
"If things go wrong, we could find ourselves at the beginning of a lengthy decline in dollar hegemony, a rapid rise in interest rates and inflation and global angst," Klarman who has run the $29 billion firm since 1982 wrote in the letter seen by Reuters.
"In short, tail risk has grown," Klarman wrote, saying he is troubled by Trump, citing the new president's "erratic tendencies and over-confidence in his own wisdom and judgment."
Many investors have rallied around Trump's promises for tax cuts and rolling back regulatory requirements, forecasting these will boost hedge fund returns. But Klarman has taken a more cautious tone, warning of potential ups and downs.
"Exuberant investors have focused on the potential benefits of stimulative tax cuts while mostly ignoring the risks from America-first protectionism and the erection of new trade barriers," Klarman wrote in the 20-page letter.
He said Baupost made money last year, earning "high single-digit gains" after having lost money in 2015 when the fund posted a "mid-single-digit decline."
Klarman was mum on specific investments, noting only that "the European pipeline remains full."
Klarman, who has run the Boston-based fund since 1982, said he plans to oversee investments for many years and announced an organizational change to help "extend my tenure."
Jim Mooney, who heads Baupost's public investments group, will take on the additional role of president, where he will be responsible for staffing, recruiting and promotions, among other things. Mark Tsocanos, a real estate expert, was also promoted to partner.
A new analyst joined the Private Investment Group last year and "several more" are joining the public and private teams this year, Klarman said.
Klarman also told investors that he is sticking with his long-successful strategy of valuing specific assets instead of making broad-based macro calls about growth or currency movements, for example.
"Many investors are now being tempted to make top-down bets based on guessing where the Trump administration will take the economy," Klarman said, adding: "It's incredibly hard to develop an edge from such top-down viewpoints."
Investors' tastes for passive investments in a small number of exchange traded funds may make global markets more vulnerable to more severe downturns, he said, and his team has to play both offense and defense to make money.
"We intend to maintain our focus on downside protection, and we will wait as long as necessary for bargains to arise."
(Reporting by Svea Herbst-Bayliss, editing by G Crosse)