Bank failures, ‘hard landing’ still top-of-mind for hedge funds

By Carolina Mandl and Davide Barbuscia

NEW YORK (Reuters) -Big U.S. hedge fund and family office investors on Wednesday cautioned that despite the U.S. economy showing resilience, a recession and more bank failures remained likely in an environment of persistent inflation.

U.S. investor Stanley Druckenmiller, chairman and chief executive officer at Duquesne Family Office, said he still expected a hard landing for the U.S. economy – a scenario where the Federal Reserve’s rate-hiking pushes the economy into a recession.

“I think the probabilities would suggest that Silicon Valley Bank, Bed Bath & Beyond (OTC:), they’re probably the tip of the iceberg,” he said, referring to Silicon Valley Bank’s failure and the downfall of the home goods retailer.

Speaking at a Bloomberg investment conference, he said the impact of higher interest rates had yet to be felt in some sectors of the economy, with more “shoes to drop” after the banking turmoil this year.

Dawn Fitzpatrick, chief executive officer of Soros Fund Management, speaking at the same event, said she believed the banking turmoil had not ended and more banks, likely small ones, could fail.

Others expressed similar concerns that the Fed would keep interest rates high to curb inflation but that elevated borrowing costs must still fully weigh on certain areas of the market such as private credit or commercial real estate.

Boaz Weinstein, founder and chief investment officer of Saba Capital Management, said private credit markets – where borrowers take loans from investors like asset managers and private equities, rather than banks – were an opportunity but also risky.

“Recession or no recession the default rate is going to rise,” he said.

Outside of the U.S., investors said U.S.-China relations were concerning and contributed to clouding an already fragile economic outlook.

Ray Dalio, the billionaire investor who built Bridgewater Associates into one of the world’s biggest hedge funds, said the countries’ relations appeared “irreconcilable” in many respects, but that he expected “restraint” from both sides.

Bridgewater is the biggest foreign hedge fund in China.

On the bright side, Duquesne’s Druckenmiller said he was bullish on artificial intelligence (AI), mainly on chipmaker Nvidia (NASDAQ:) Corp. Nvidia’s shares have more than doubled year to date amid an AI boom. The company briefly touched the $1 trillion market capitalization late in May. “Unlike crypto, I think AI is real,” he said. “If it’s as big as I think it is, Nvidia is something we’re going to want to own for at least two or three years. Not for ten months. And maybe longer.”

Overall, investors cautioned that it was still time to be defensive, despite the fact that the Fed’s rate-hiking cycle is likely coming to an end soon.

“When you think about all the uncertainty there is in the market, is a time to be cautious because the pricing, leaving aside some AI stuff that can keep going, is not there,” Weinstein said.

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