Gondor Capital Management, the New York-based hedge fund management firm founded by Vincent Au, continues its winning streak as its two funds generated returns in August, a month punctuated by fears over the escalating tension in the Korean Peninsula.
Au said that his domestic Gondor Partners LP generated a +1.07 return last month (+14.93% year to date) while the offshore Gondor Funds LTD gained +0.76 during (+13.04% year to date). Gondor’s strong performance dwarfed the average hedge funds last month as HFR's widely followed HFRX Global Hedge Fund Index gained +0.29% for the month, reversing a slight loss in place midway through the period. For the year to date, the benchmark index is up +3.81%. Meanwhile, HFR's HFRX Absolute Return, HFRX Equal Weighted Strategies, and HFRX Market Directional indexes returned +0.65%, +0.19% and -0.63%.
“The ongoing crisis in the Korean Peninsula that played a key role in the performance of some hedge funds in August had no effect on the funds under our management,” said Au.
Hedge funds warn of market fall, fear war
Ray Dalio (Trades, Portfolio) of the world's largest hedge fund, Bridgewater Associates, posted in LinkedIn (LNKD, Financial) an article warning of a possible market fall because of the geopolitical play between the U.S. and North Korea, adding that the crisis has made it more challenging to price in. He said that the emerging risks posed by the geopolitical play between Washington and Pyongyang is "more political than economic, which makes them especially challenging to price in."
Dalio wrote, "Prospective risks are now rising and do not appear appropriately priced in. Two confrontational, nationalistic and militaristic leaders [are] playing chicken with each other, while the world is watching to see which one will be caught bluffing, or if there will be a hellacious war."
In a separate article, Dr. Michael Ivanovitch said hedge funds and investment managers are worried about the current military standoff in Northeast Asia and have raised a caution flag on asset values in countries (making up 40% of the world economy) most likely to be affected should a shooting war erupt in the Korean peninsula.
"In an environment of confusion and bellicose rhetoric, it is perhaps normal that people known for their daring market bets should be erring on the side of prudence," Ivanovitch wrote. He added, "What else is there to do when the White House says that the time for a talk with North Korea is over while the Pentagon urges diplomatic efforts, and a British military analyst, writing for a major Western Newswire, doubts whether the U.S. would be able to intercept Pyongyang's missiles?"
There are bigger concerns than the stock market in case of full-blown conflict
While Au admits that North Korea poses a certain risk to the markets, he is looking at the existing geopolitical play in the region “in a different perspective and outside the world of finance.”
“If there was a nuclear conflict involving North Korea, there are bigger concerns than the stock markets,” he said.
In June, Au stated that among his concerns is the possibility of military conflict between the U.S. and another country. He described President Donald Trump's personality as much more aggressive in responding to threats such as North Korea. “Unlike the previous administration, the Trump administration does not kowtow,” he said then.
Au said that military conflict is not priced in the financial markets “because it is too unbelievable to happen.” He continued, “The markets have always believed that such a conflict would never happen because the consequences would be very bad.”
In the meantime, Au reiterated his constant concern with the currency and the interest rates. According to him, the strength in the yuan and euro is unexpected and poses a threat to China's Central Bank policies and to the European Central Bank.
“Low rates have been the main driver for higher asset prices for almost a decade. The addiction to low rates like other addictions will not be painless when it ends,” he added.
Moving forward, Au said that market or trading opportunities “will come when they come.” He continued, “The timing is not important. The important elements in taking advantage of ‘opportunities’ are price, patience and discipline.”
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
