BusinessInsider/Rachael Levy/07-18-17
Baupost Group, a $30 billion hedge fund, has laid out a road map for market chaos.
In a second quarterly private letter that was reviewed by Business Insider, Baupost said that the problem lies with a signature feature of current markets: low volatility.
That low volatility could be the harbinger of a crisis to come.
That’s because when there is low volatility, investors tend to take on more leverage – borrowing money to juice bets – which could trigger problems later on.
“While leverage is not directly responsible for every financial disaster, it usually can be found near the scene of the crime,” Jim Mooney, Baupost’s president and head of public investments, wrote in the letter. “The lower the volatility, the more risk investors are willing to or, in some cases, required to incur.”
He added: “Structural leverage linked to low realized volatility may well prove destabilizing and the precipitant, or at least an accelerant for the next financial crisis.”
