(This isn't an AI post, keep reading...)
I manage an institutional account, in addition to my personal account.
That sounds boastful, but it isn't.
Actually, I don't talk about the institutional side much, because it's much more boring than you'd expect. Institutional money is by necessity, incredibly conservative.
Really, it's just a medium-sized private company, based in Europe, that has saturated their market. Probably you drive past hundreds of these "institutions" every day.
We do some private equity investments, but there's limits to those opportunities. The only way left to grow - and hedge capital risk - is to invest excess capital in public markets.
The gap-up on Tuesday was alarming...
From our perspective, we don't focus on P/L, we care about risk-adjusted return. Those risks just increased dramatically.
A market that can gap-up like a meme token, can also gap-down like a meme token. That's hugely concerning for a conservative institution that has a primary goal of capital preservation.
It's also highly concerning to see the market completely captured by geopolitics and, in particular, one man's tweets.
It's only human nature for an unparalleled amount of insider activity to be taking place - again, eating away at our risk-adjusted return.
From a geopolitical perspective, we have two factions (US, Iran) passing notes to each other, through an intermediary (Pakistan) that has a vested interest in avoiding regional destabilization. Now we come to understand, those notes magically said different things.
Additionally, we see the reputation of the USA as a reliable partner diminishing on a daily basis. What's to stop the seizure/tax/nationalization of foreign-held assets?
Admittedly, that's still a remote possibility, but it still has to feed into the risk adjustment.
Actually, the US has even published their new strategy: isolate and control the "western hemisphere"... disrupt trade and cooperation in the "eastern hemisphere". Sound familiar?
Since we're in the eastern hemisphere, it doesn’t make much sense risk-wise to keep investing westward.
And finally, we look at the US dollar. When European institutions invest in the United States, we have to hedge our currency risk. That hedging is becoming more expensive.
Thefore, this week we're completely eliminating all publicly-listed US assets.
Instead, we're shifting the bulk of our capital to diversified "EX-US" international markets, and increasingly into European short-duration fixed-income.
Yes, the nominal returns are lower, but the risk-adjusted returns are much better. It won't shield us from a sympathetic sell-off, but the multiples are lower.
I also want to emphasize that, just because US multiples are higher in the last couple of decades, it doesn’t mean that "normal" has to continue. In fact, we may be early movers in a historic capital flight.
I don't pretend to know what will happen. I just thought it might be interesting to share a different perspective.