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Visualizing How Billionaire Investors Hedge Against Geopolitical Black Swans

DATE POSTED:November 3, 2017

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