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

Kim Jong Un

As geopolitical tensions between North Korea and the U.S. rise, hedge fund managers are preparing their portfolios for a possible market fall.

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, the manager of the world's largest hedge fund with $160 billion 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 percent to 10 percent of their portfolios to gold.

In similar fashion, Pershing Square'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 Capital Management'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.

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