Louis Bacon, founder of the $15 billion hedge-fund firm Moore Capital Management LLC, told investors he expects further weakness in the euro and a bear market in the U.S. by the end of the year.
“Perhaps the most interesting area for the foreseeable future is in the potential breakdown of the European Monetary Union” because of the way Europe is dealing with the threat that Greece will default on its bonds, Bacon wrote in a letter dated April 16.
Greek officials are holding a second day of talks today with the European Commission and International Monetary Fund on a 45 billion-euro ($60 billion) bailout package. Greek bond yields surged to the highest since 1998 as the European Union said the country had a wider budget deficit than previously estimated, pushing the euro lower for a sixth straight day.
Opting for a rescue of Greece, rather than kicking the country out of the European Monetary Union or forcing it to restructure its debt, could cause long-term and disastrous consequences for the European currency, wrote Bacon in the 12-page letter.
“Investors had always regarded the euro as a de jure German Deutsche mark,” Bacon said. “It is dawning on the world that it is becoming, de facto, a Greek drachma.”
The euro dropped 0.5 percent to $1.3322 at 8:43 a.m. in New York, from $1.3390 yesterday, and traded at 123.95 yen, compared with 124.77 yen. Europe’s single currency has weakened 6.8 percent against the dollar this year on concern Greece’s difficulty in containing its budget deficit will spread.
Bacon said he expects sovereign wealth funds to eventually sell euros and instead buy currencies of emerging markets, “where solvency is not such an issue.”
Bacon, who started trading his oldest fund, the $7.3 billion Moore Global Investments Ltd., 20 years ago, has returned 20.5 percent a year since inception. The fund chases macroeconomic trends by trading stocks, bonds, currencies and commodities.
The Moore Global fund returned 2.3 percent this year through March, following a 22.1 percent return in 2009, the letter said. That compares with a 2.6 percent for the Credit Suisse/Tremont Global Macro Index so far this year, and an 11.6 percent return for that index in 2009.
While Bacon is currently betting on growth in the U.S. economy, fueled by fiscal and monetary stimulus, he forecast the rebound will be short lived.
‘Bearish’ on U.S.
“We should see a resumption of a bearish market amid the secular softening of U.S. economic might” by the end of the year, he wrote.
Moore Global received about $5 billion in redemptions, or half the fund’s assets, after 2008, even though losses of 4.6 percent that year were well below the 19 percent average for all hedge funds.
Many funds suspended or limited redemptions in 2008, meaning investors in need of cash were forced to withdraw money from any fund that would allow them to exit.
To avoid such withdrawals in the future, Bacon said he is looking for “stickier” capital from institutional investors such as endowments and foundations.
“Now we understand we need to be more selective in choosing our investors so we can better protect our long-term asset base,” he said.