Hedge fund Element warns of deep economic blow from new virus strain


Investors and policymakers are failing to grasp how deeply the new variant of coronavirus will damage the European economy, Element Capital, one of the world’s largest macro hedge funds, has warned.

Expectations for economic growth need to be cut as the B.1.1.7 coronavirus variant spreads beyond UK borders, and lockdowns across the continent could extend months beyond current estimates, the fund’s head of markets Colin Teichholtz said in an interview.

“What you are seeing in the UK today you will see over much of continental Europe, and I don’t think markets [and] . . . policymakers are really grasping that,” Mr Teichholtz said. “Are policymakers getting this? Are people updating their economic forecasts for the second quarter to reflect a much worse outcome in terms of the economy being able to reopen? There is very little indication of that in forecasts.”

Element has emerged as one of the hedge fund success stories of the pandemic crisis, betting early that the BioNTech and Pfizer vaccine would be more effective than the broader market anticipated. The fund returned 18.8 per cent last year and has never reported a down year since billionaire Jeffrey Talpins launched the fund in 2005.

The pessimistic outlook from Mr Teichholtz stemmed from low vaccination rates across the EU, with countries such as Germany, France and Spain lagging behind the pace of inoculations in the US and UK.

UK Prime Minister Boris Johnson warned on Friday that the new variant might be more lethal and more infectious than the earlier wave of the virus.

European Central Bank president Christine Lagarde last week described new virus variants from the UK and South Africa as “not so positive” factors that “could require more stringent measures”. Still, Mr Teichholtz pointed to her assertion that the central bank’s forecasts for 3.9 per cent growth in 2021 remain “broadly valid”.

“That set of assumptions has to be off by at least a quarter and that’s another three months of people being stuck at home, people being furloughed, many companies . . . not being able to function,” he added.

He cautioned that lockdowns could last until June if policymakers did not take more aggressive measures across the continent to contain the virus soon.

The senior member of Element’s portfolio management team, who joined the firm from BlueMountain Capital in 2019, declined to comment on the fund’s positioning. Last August, Mr Talpins told clients the fund was wagering on a decline in European equities at the time and had taken a “significant short position”.

Mr Teichholtz said the brisk pace of vaccinations in the US would probably insulate the country from the same outbreak that he envisions in Europe. Stock markets in both regions have continued to advance this year, with the benchmark Euro Stoxx 600 marginally outpacing the S&P 500.

“I don’t think it is crazy for markets looking out over a longtime horizon to feel good . . . and certainly central banks have made clear at least for the foreseeable future they’ll keep policy very easy,” he said.

“That being said, I would say whatever your assumption is for global growth for the first half of 2021, you should probably move that assumption a little lower because of the impact likely in Europe.”



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