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Billionaire hedge fund managers worried about North Korea risk, braced for a possible market drop

  • As geopolitical tensions between North Korea and the U.S. rise, hedge fund managers are protecting their portfolios against a market fall.
  • "Two confrontational, nationalistic, and militaristic leaders [are] playing chicken with each other," Bridgewater's Ray Dalio wrote on Aug. 10, referring to the heads of state of North Korea and the U.S. He recommended gold as a safe haven asset.
  • Pershing Square's Bill Ackman said on Aug. 16 that his firm bought out-of-the-money call options on a volatility index to hedge against the risk of a market decline.

Hedge fund managers braced against a market fall this month because of rising geopolitical risk between the U.S. and North Korea.

Tensions escalated again when North Korea launched a missile over Japan on Tuesday local time, driving U.S. stock index futures lower. In response, President Donald Trump later said in a statement, "All options are on the table" for North Korea.

Earlier in August, he warned that any additional threats from North Korea "will be met with fire, fury and frankly power the likes of which this world has never seen before."

Hedge fund managers have been adjusting their portfolios. Bridgewater's Ray Dalio, manager of the world's largest hedge fund with $160 billion in assets, specifically cited the potential conflict between U.S. and North Korea leaders for his recommendation to buy safe haven assets.

"Prospective risks are now rising and do not appear appropriately priced in," Dalio wrote in a LinkedIn blog post on Aug. 10.

"Two confrontational, nationalistic, and militaristic leaders [are] playing chicken with each other, while the world is watching to see which one will be caught bluffing, or if there will be a hellacious war," he wrote.

"We can also say that if the above things go badly, it would seem that gold (more than other safe haven assets like the dollar, yen, and treasuries) would benefit," he added.

Dalio said investors should allocate 5 to 10 percent of their portfolios to gold.

In similar fashion, Pershing Square Capital Management's Bill Ackman also revealed he prepared for the possibility of a stock market drop due to rising geopolitical risk.

Ackman said during Pershing Square's second-quarter conference call on Aug. 16 that his firm took a "small position" in out-of-the-money call options on a volatility index.

This hedge "will protect against stock market risk," he said, citing a potential conflict on the Korean peninsula.

WATCH: Markets don't believe action imminent for North Korea