John Burbank, founder of $3.8 billion hedge fund Passport Capital LLC, said he expects a U.S. economic recession this year or in early 2013, according to a letter to investors.
Passport is “very bearish” and anticipates “a major retrenchment in risk assets,” Burbank said in the March 27 letter, a copy of which was obtained by Bloomberg News. The San Francisco-based firm increased its short positions, or bets that security prices will fall, added to gold holdings and bought Brent oil starting in the second half of last year, he said.
“We see a recession in 2012 or early 2013 for the U.S. which will be difficult to avoid as Europe contracts and China moderates to 7 percent to 8 percent targeted growth,” Burbank said in the letter. “The equity market is confused about true economic growth in the developed world -- we believe it will be much lower than forecast.”
Passport last month fired 14 employees following losses in 2011. The fund slumped 18 percent last year, compared with an average loss of 5.8 percent for all hedge funds, according to data compiled by Bloomberg. Passport, which has gained 3.7 percent this year through February, expected redemptions of $560 million or less on March 31, Burbank said in the letter.
The firm has reduced its illiquid investments and commodities equities, while increasing its holdings of Saudi Arabian stocks and mortgage-backed securities, according to the letter.
“Saudi equities constitute the best single asymmetric equity market we can find and as a result continue to be the single largest equity allocation in Passport Global,” Burbank said in the letter.
Saudi Arabian stocks will probably comprise a “mid-teens” percentage of the portfolio through 2012, Burbank said. The firm hired Jeffrey W. Kong, formerly of Structured Portfolio Management LLC, last April to oversee its investment strategy for mortgage-backed securities and related fixed-income assets.
Passport, a multistrategy hedge fund, was founded by Burbank in 2000. It invests in agriculture, basic materials, energy, financial services, health care, capital markets and the Internet, among other things, according to the firm’s website.
Steve Bruce, a spokesman for Passport, declined to comment on the letter.