Sudden price hikes were only one of the Elliott team's worries, according to the firm's latest missive.
Up 8.4 percent for the year through September, money managers at the $30 billion hedge fund spend much of their time simply avoiding losses and hedging for various outcomes, the writers noted, in addition to looking for attractive opportunities in stocks, bonds and other asset classes.
Lingering over Elliott's portfolio management, the writers added, is a persistent fear that central bankers — by collectively cutting interest rates 673 times since the financial crisis — have so upended the natural price levels of stocks, bonds and many other assets, that the economy and markets are operating in denial of reality.
"Every sniffle is being treated by central banks as acute respiratory distress syndrome worthy of 'code-blues' and teams of frantic pumpers and fixers," the managers wrote. "What this policy landscape has engendered is a widespread belief, or at least a strong suspicion, that stock and bond prices won't ever be allowed to go down in any meaningful way."
This mentality, the writers added, "has encouraged massively risky behavior."
Elliott isn't the only hedge fund to sound leery of current monetary policy.
In a letter to Greenlight Capital investors also dated Oct. 28, hedge fund managers there pointed out that despite being seven years into an economic recovery, "central bankers still behave as if we're in crisis," and that, even with Fed Chair Janet Yellen suggesting that rate hikes are near, policymakers have shown little interest in normalizing the environment.
In a Nov. 1 investor letter from Third Point, managers noted that the effectiveness of monetary policy is "waning," and that "a clear path to growth seems elusive." The managers added that 2 percent GDP growth may soon seem like a fantasy.