Seth Klarman says inflation is a 'real danger' to markets and he's hedging against it

Published Thu, Jan 27 20221:02 PM ESTUpdated Thu, Jan 27 20221:44 PM EST

Baupost Group's Seth Klarman said Thursday surging inflation poses a "real danger" to the markets and he's hedging against outsized price gains. "We don't know how bad the current bout of inflation will be, but we believe that mounting inflation and the related possibility of materially higher interest rates are posing a real danger to financial markets," Klarman in an investor letter obtained by CNBC. "To protect against continuing inflation and the prospect of rising rates, we have purchased hedges that stand to gain in such an environment," he added. His inflation warning came as price pressures jumped at their fastest 12-month pace in nearly 40 years in December. The consumer price index surged 7% last month, the largest gain since June 1982. To tame raging prices, the Federal Reserve indicated Wednesday that it could soon raise interest rates for the first time in more than three years as part of a broader tightening of historically easy monetary policy. Klarman has drawn comparisons to Warren Buffett for his disciplined and patient value style. Klarman's hedge fund manages about $30 billion as of 2020 after racking up years of market-beating returns. "With the possibility of higher interest rates coming into focus, investors had become less willing to pay astronomical multiples for uncertain and distant future cash flows," Klarman said. Technology shares led a steep sell-off in the new year as investors rotated out of high-flying sometimes-profitless names. The Nasdaq Composite has fallen about 14% in January and nearly 17% from its record high, dipping deep into correction territory. Klarman is not alone in sounding the alarms on inflation. Just Wednesday, Greenlight Capital's David Einhorn said persistently high inflation is eventually going to tip the U.S. economy into another recession, regardless of what the Fed will do to combat surging prices. Last year, Baupost made investments in commercial real estate as well as private corporate equity and credit, Klarman said. Public equities made up for 43% of its portfolio assets at year-end, he added. — CNBC's Michael Bloom contributed reporting.

Seth Klarman, chief executive officer of The Baupost Group LLC, listens during an interview in New York, June 8, 2018.

Jeenah Moon | Bloomberg | Getty Images

Baupost Group's Seth Klarman said Thursday surging inflation poses a "real danger" to the markets and he's hedging against outsized price gains.