FUND MANAGER: Investors are totally unprepared for the future of the market

Investors are unprepared for big changes coming to financial markets, says John H. Burbank III, the chief investment officer of $4.5 billion hedge fund Passport Capital.

“My overarching belief is the future — three, five years from now — will be unrecognizable from today,” Burbank said on Thursday at the University of Texas Management Co’s 20th anniversary event in Austin.

If there’s one thing he would focus on now, it is the lack of liquidity in capital markets.

Burbank is among a group of money managers who have been sounding the alarm for an impending liquidity crisis. In other words, if the market sells off again there simply won’t be enough participants to take the other side of the trade. In that situation, the market will face a precipitous decline if even a small amount of funds look to sell.

“I just believe that you need to change how you invest and how you think about the future now — not from a fundamental point of view, but do you have enough liquidity for a set of circumstances which may be completely opposite to what you think and what you’re being told?” he said.

Changing liquidity is going to impact the way stocks are valued, he said.

“I would say that liquidity sets the multiple of a security. It was no accident 2013 was the best year in this [quantitative easing] regime because that’s when the most liquidity was in the market and had the highest multiple,” he said.
“I think unless policymakers come up with a way of providing more liquidity we’re going to see much lower multiples even if the growth or the earnings are OK.”

But he doesn’t think it’s going to be “OK” thanks to the rising dollar and the end of quantitative easing.

And that means there will be big sections of the capital markets that become un-tradeable. Already lower liquidity is hurting high yield bonds and emerging markets credit.

“You can barely sell EM equities,” he said.

Burbank started out in 1994. He worked a hedge funds in the Bay Area, where he focused on emerging markets during the Asian financial crisis. He launched Passport Capital in 2000, toward the end of the dot-com bubble. In 2007, he bet against the subprime housing market.

“If you go forward five years, successively, — summer 99, December 04, December 09, December 14, you realise there’s nothing in the price of the successive years that told you accurately about the future,” he said.

Burbank’s Passport Capital, which uses a combination of micro, macro, and quantitative approaches to investing, is among the best-performing hedge funds so far this year, according to data compiled by HSBC.

Passport’s special opportunities fund was up 16% through the end of January. Passport’s global strategy fund was up more than 4.8% during that time. It follows a strong 2015, with those funds ending the year up 17.81% and 10.9%, respectively.

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