Scott Bessent’s hedge fund earned its greatest returns by betting towards the Federal Reserve that the explosion of U.S. inflation in 2022 would show longer-lasting than the central financial institution anticipated.
The wager made by the person Donald Trump picked final week to be his Treasury secretary noticed Bessent’s flagship Key Square Capital fund submit returns of 29% in 2022 because the broader market slumped.
The massive inflationary commerce concerned short-selling of fixed-income belongings and low-revenue-generating expertise shares backed by rival fund managers, together with Cathie Wood.
The transfer bolstered Bessent’s fame as an knowledgeable on monetary turmoil, which supporters say could possibly be essential as he leads Trump’s financial system.
“Scott may be very cerebral and a worldwide opportunist who does greatest when there may be chaos,” stated an individual near Bessent. “He can play a number of (monetary) devices to place himself on prime of others. . . throughout peaceable instances he might have problem discovering a successful angle.
The bumper 2022 marked a restoration for Bessent’s fund, which has just lately drawn criticism for lean years through which its macro funding technique – like that of different macro-focused funds – struggled to seek out an edge in a interval of decrease rates of interest.
On Friday, Trump selected Bessent to run the Treasury Department over Wall Street heavyweights together with personal fairness chief Marc Rowan and investor Howard Lutnick.
The job will give Bessent monumental affect over the world’s largest financial system, and with it world markets. He will probably be tasked with protecting Trump’s promise to chop taxes whereas containing the financial fallout from the president-elect’s plans to deport hundreds of thousands of immigrants and lift tariffs.
“He’s seen just about every little thing by way of issues which may come up, most likely greater than anybody else who has held the job earlier than,” Stanley Druckenmiller, the billionaire investor who first employed Bessent at Soros Fund Management in 1991, instructed the Financial Times “I feel it is an incredible alternative.”
Trump stated Bessent is among the many world’s “main worldwide buyers and geopolitical and financial strategists,” though critics had been shocked by his rise.
Key Square’s blockbuster 2022 returns apart, Bessent was “nowhere close to” the standing of legendary macro fund managers like Druckenmiller, Paul Tudor Jones or Louis Bacon, one investor stated.
“If he had carried out very well as a hedge fund supervisor, then his enterprise would have reached such a stage that he couldn’t or wouldn’t take a job in authorities,” the investor stated.
Bessent’s Key Square, which at its peak managed $4.5 billion in belongings, has posted common annual returns within the mid-single digits since 2015, in response to an individual accustomed to the matter.
Returns had been optimistic in 4 years, adverse in one other 4 and impartial in a single 12 months, in response to the individual.
Key Square’s returns have change into a part of the bitter battle for Treasury’s job in current weeks, as paperwork purportedly displaying the fund’s outcomes circulated in Wall Street discussion groups in an obvious try to discredit Bessent.
Supporters stated its funding technique and efficiency in 2022 replicate an angle of threat and calm within the face of financial turbulence which will quickly be wanted.
Bessent labored alongside George Soros – a determine hated by many in Trump’s Maga motion – when the famed hedge fund boss wager towards the pound in 1992, and once more when he took on the yen in 2013. Soros invested $2 billion within the Bessent fund. launch in 2015.
People near Bessent stated one in every of his signature trades was a wager on Japan’s “three arrows” financial coverage below then-Prime Minister Shinzo Abe.
The technique favored sturdy progress on the again of what Bessent described as “free financial coverage, fiscal flexibility and structural financial reforms.”
Bessent’s success in 2022 got here as provide chain disruption, hovering vitality costs after Russia’s invasion of Ukraine and heavy Covid-19 stimulus spending mixed to ship US inflation at multi-decade highs, inflicting widespread struggling for customers.
Bessent wager that inflation would final for much longer than many economists — on the Fed and the White House — predicted and shorted fixed-income belongings that will wrestle as banks raised charges energy vegetation and expertise firms with inflated valuations.
While Key Square yields have risen, the S&P 500 has fallen greater than 18% in 2022. Hedge Fund Research’s Composite Index has misplaced about 4%. The firm grew double digits once more in 2023 and is on monitor to do the identical in 2024, in response to two folks accustomed to the returns.
Bessent’s appointment to the Treasury has been welcomed by many on Wall Street, as buyers put together for a second Trump period. “He’s not a shouter,” stated one former colleague, who praised Bessent’s crisis-ridden senior boss. “Obviously, he was helpful to him on this capability.”
In a January letter to shoppers, Bessent outlined his thesis on Trump. The incoming president “want to create an financial looza lick and engineer what he’ll probably name ‘the best 4 years in American historical past,’” he wrote.
Bessent additionally promoted Trump’s plan to scale back vitality costs whereas downplaying his threats of tariffs.
“The tariff gun will at all times be loaded and on the desk, however hardly ever unloaded,” Bessent wrote.
