Scott Bessent’s fund made biggest returns with bet against Fed

Scott Bessent’s hedge fund notched its best returns with a contrarian bet against the Federal Reserve that the burst of US inflation in 2022 would prove more lasting than the central bank predicted.

The wager made by the man Donald Trump picked last week to be his Treasury secretary saw Bessent’s Key Square Capital flagship fund score returns of 29 per cent in 2022 as the wider market fell.

The bonanza inflation trade involved shorting fixed-income assets and tech stocks generating low revenue that were backed by rival fund managers including Cathie Wood.

The move bolstered Bessent’s reputation as an expert in financial turmoil, which supporters say could be critical as he helms Trump’s economy.

“Scott is very cerebral and a global opportunist who does best when there is chaos,” said a person close to Bessent. “He can play multiple [financial] instruments in order to position himself on top of the rest . . . during peaceful times he can struggle to find a winning angle.”

The bumper 2022 marked a recovery for Bessent’s fund, which recently drew criticism for lean years when his macro investing strategy — like that of other macro-focused funds — struggled to find an edge in a period of lower interest rates.

Trump on Friday picked Bessent to run the Treasury department over Wall Street heavyweights including private equity boss Marc Rowan and investor Howard Lutnick.

The job will give Bessent huge sway over the world’s largest economy, and with it global markets. He will be tasked with fulfilling Trump’s vow to slash taxes while containing the economic fallout from the president-elect’s plans to deport millions of immigrants and raise tariffs.

“He’s seen just about everything in terms of issues that could arise, probably more so than anyone who’s filled the job previously,” Stanley Druckenmiller, the billionaire investor who first hired Bessent to Soros Fund Management in 1991, told the Financial Times. “I think he’s a great choice.”

Trump said Bessent was among the world’s “foremost international investors and geopolitical and economic strategists”, although critics were surprised at his elevation.

Key Square’s blockbuster 2022 returns aside, Bessent was “nowhere near” the status of legendary macro fund managers such as Druckenmiller, Paul Tudor Jones or Louis Bacon, one investor said.

“If he had done really well as a hedge fund manager, then his business would be at a size where he couldn’t or wouldn’t take a post in government,” the investor said.

Bessent’s Key Square, which at its peak managed $4.5bn of assets, has recorded average annual returns in the mid-single digits since 2015, according to a person familiar with the matter.

Returns were positive in four years, negative in another four and neutral one year, according the person.

Key Square’s returns became part of the bitter battle for the Treasury job in recent weeks, as documents allegedly showing the fund’s results circulated in Wall Street chat groups, in an apparent bid to discredit Bessent.

Supporters said his investment strategy, and performance in 2022, reflected an aptitude for risk and calm in the face of economic turmoil that could soon be needed.

Bessent worked alongside George Soros — a hate figure for many in Trump’s Maga movement — as the famed hedge fund boss bet against the pound in 1992, and again when he took on the yen in 2013. Soros ploughed $2bn into Bessent’s own fund on its launch in 2015.

People close to Bessent said one of his own signature trades was a bet on Japan’s “three arrows” economic policy under then-prime minister Shinzo Abe.

The strategy drove strong growth on the back of what Bessent has described as “loose monetary policy, fiscal flexibility, and structural economic reforms”.

Bessent’s success in 2022 came as supply chain disruption, soaring energy prices after Russia’s invasion of Ukraine and heavy Covid-19 stimulus spending combined to send US inflation to multi-decade highs, causing widespread consumer pain.

Bessent bet that inflation would last far longer than expected by many economists — in the Fed and the White House — and shorted fixed-income assets that would struggle as the central banks raised rates, and tech companies with inflated valuations.

While Key Square’s returns soared, the S&P 500 fell by more than 18 per cent in 2022. Hedge Fund Research’s Composite index lost about 4 per cent. The firm was up by double-digits again in 2023, and is on track to do the same in 2024, according to two people familiar with the returns.

Bessent’s Treasury nomination has been welcomed by many on Wall Street, as investors brace for a second Trump era. “He’s not a yeller,” said a former colleague, who praised Bessent’s level head in crisis. “Obviously, that’s served him well in this capacity.”

In a January letter to clients, Bessent outlined his thesis about Trump. The incoming president would “want to create an economic lollapalooza and engineer what he will probably call ‘the greatest four years in American history’”, he wrote.

Bessent also promoted Trump’s plan for cheapening energy supplies, while playing down his threats of tariffs.

“The tariff gun will always be loaded and on the table but rarely discharged,” Bessent wrote.


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