Bessent's hedge fund had achieved high returns through contrarian bets against the Fed, as he believed inflation would be more persistent than the Fed predicted in 2022.
Bessent was nominated by Trump last week as the new government's Treasury Secretary, with his flagship fund Key Square Capital achieving a 29% return in 2022, while the broader market declined.
This bet that inflation will continue to rise involves shorting fixed income assets and low-income tech stocks, the latter of which had previously received support from competitors including 'Cathie Wood'.
This move solidifies Bessent's reputation as an expert in financial turmoil, with supporters arguing that it is crucial for him to lead Trump's economic agenda.
A person close to Bessent said, 'Bessent is very smart, a global opportunist who performs best in chaotic times. He can use a variety of financial tools to keep himself ahead... but in peacetime, he may struggle to find opportunities that set him apart.'
The generous returns in 2022 marked a revival for Bessent's fund, which had recently faced criticism for years of lackluster performance, during which his macro investment strategies struggled, like many other macro-focused funds, to find an edge in a low-interest-rate environment.
Trump chose Bessent to lead the Treasury last Friday, surpassing heavyweight figures on Wall Street including private equity boss Mark Rowan and investor Howard Lutnick.
This role will give Bessent a significant impact on the world's largest economy and global markets. His task will be to fulfill Trump's tax cut promises while managing the economic impact of the president-elect's plans to expel millions of immigrants and raise tariffs.
Stan Druckenmiller, the billionaire investor who first hired Bessent at Soros Fund Management in 1991, said, 'In terms of potential problems, Bessent has almost seen it all, probably more than anyone who has previously held this position, I think he is a great choice.'
Trump stated that Bessent is one of the world's 'most outstanding international investors and geopolitical and economic strategists', although critics were surprised by his nomination.
An investor stated that aside from Key Square's record returns in 2022, Bessent is 'far from' the status of legendary macro fund managers like Druckenmiller, Paul Tudor Jones, or Louis Bacon. This investor said, 'If he did very well as a hedge fund manager, then his company would be so large that he couldn't or wouldn't want to hold a government position.'
According to an informed source, Bessent's Key Square once managed $4.5 billion in assets at its peak, but its annualized return since 2015 has been in single digits. According to this person, the fund had four years of positive returns, four years of negative returns, and one year flat.
In recent weeks, Key Square’s returns have become a part of the competition for Treasury Secretary, with a document showing the fund's performance allegedly circulating in Wall Street chat groups, seemingly to tarnish Bessent's reputation.
Supporters say that his investment strategies and performance in 2022 reflect his sharpness in risk assessment and ability to remain calm in the face of economic turmoil, abilities that will soon be needed.
Bessent previously worked with George Soros, who is a target of hatred for many Trump supporters; this famous hedge fund mogul shorted the pound in 1992 and shorted the yen in 2013. Soros invested $2 billion in the fund he founded in 2015.
According to people close to Bessent, one of his signature trades was betting on Japan's 'Abenomics' economic policy under then-Prime Minister Shinzo Abe, which generated strong performance growth for him.
Bessent's success in 2022 coincided with supply chain disruptions, soaring energy prices after the Russia-Ukraine conflict, and massive COVID-19 stimulus spending that collectively pushed U.S. inflation to decades-high levels, causing widespread pain for consumers.
Bessent's bet that inflation will last much longer than many economists (Fed and White House) expect, and he shorted fixed income assets that are difficult to maintain as the Fed raises interest rates, as well as overvalued tech companies.
While Key Square's returns soared, the S&P 500 index fell more than 18% in 2022. The comprehensive index from hedge fund research companies dropped about 4%. According to two informed sources, the company’s gains in 2023 again reached double digits and is expected to achieve similar growth in 2024.
Bessent's nomination as Treasury Secretary has been welcomed by many on Wall Street, as investors prepare for a second Trump era. 'He is not a loud person,' said a former colleague of Bessent, praising his calmness in crises. 'Clearly, he is very advantageous in this position.'
In a letter to clients in January, Bessent outlined his arguments for Trump. He wrote that the incoming president would 'want to create an economic carnival and orchestrate what he might call 'the greatest four years in American history'.
Bessent also praised Trump’s plans to lower energy supply costs while downplaying the threat of increasing tariffs. Bessent wrote, 'The 'tariff gun' is always loaded and on the table, but it rarely actually goes off.'
Article forwarded from: Jin Shi Data