- Elliott Management, one of the world's largest hedge funds with $34 billion, told clients that the ingredients for a market crash are all here.
- The hedge fund was founded by billionaire Paul Singer, a big GOP donor.
- The firm has been prepping for a significant market event - raising $5 billion in less than 24 hours earlier this year.
"Markets are in a kind of dreamland."
That's according to Elliott Management, one of the world's largest hedge funds. The firm, led by billionaire GOP donor and hedge-fund manager Paul Singer, said markets are at high risk, partially due to super-low interest rates, according to a third-quarter client letter seen by Business Insider.
The stock market has been raging, with the S&P 500 hitting new highs Wednesday.
"The current 'stability' is not sustainable," Elliott wrote. "Monetary policy has been extraordinary, and the end of this period of its policy ascendancy and the consequent levitation of asset prices, whenever it occurs, will likely be commensurately extraordinary."
Elliott says it doesn't know when markets would turn, and to be sure, the firm has been warning about some kind of market chaos for some time. Earlier this year, the hedge fund raised $5 billion in 24 hours from investors to put money to work, expecting "all hell to break loose."
In the most recent letter, Elliott laid out the "historical recipe for a crash":
- "ominously overpriced assets financed by too much debt;
- a tightly wound matrix of highly leveraged trading positions;
- technical or situational accelerants (in 1987, "portfolio insurance; today, all kinds of negative gamma strategies, the false liquidity of ETFs, volatility selling, massive leveraged bond ownership at the highest price for duration in history, financial institution balance sheets that remain completely opaque and highly leveraged)."
Elliott added (emphasis added):
"This kind of history is not a blueprint, and certainly many of these "recipe" elements appeared well before 2017. But we think history is NOT bunk, and that markets are in a kind of dreamland. If and when they wake up, investors and traders may not like what they see. It is not far fetched to imagine the widespread and tightly-held assumptions of millions of investors being smashed like pumpkins in a future (actually, "back to the future") environment."
Elliott also pointed out specific concerns for the bond markets:
"If economic growth, appearing to tilt ever-so-slightly upward now in Japan and Europe, and growing steadily but slowly in the U.S., actually accelerates even a modest amount, if demand for commodities increases, and if such environment causes wages and prices to rise, one could envision a severely negative impact on global bond markets."
Elliott managed $34.1 billion as of October 1, the letter said.
The firm is barely beating competitors in performance this year through the end of September. The Elliott Associates LP fund is up 6.8% after fees and the Elliott International Limited fund is up 6% after fees this year through the third quarter, according to a client note reviewed by Business Insider.