(Bloomberg) -- Bill Harnisch came into the new year with a cautious view on equities. That hasn’t kept his $1.8 billion hedge fund from delivering a market-beating return in the face of a formidable rally. 

With his fund up 18% through Wednesday, the founder of Peconic Partners is building on a four-year stretch of outperformance that includes a 26% gain in 2022, a year the S&P 500 Index plunged. 

In an interview, he credited the recent success to a slew of bold stock wagers that proved prescient, including a bearish bet against Starbucks Corp., the coffee chain, as well as bullish positions in long-held infrastructure plays like Quanta Services Inc. and Dycom Industries Inc. 

Convinced power demand will boom amid the proliferation of artificial intelligence and electric vehicles, the money manager started snapping up utilities in March — including NextEra Energy Inc. and Southern Co. — before the industry took off as the market’s leader. 

Of course, not everything paid off. A short position in the SPDR S&P 500 ETF Trust, for instance, has offset gains. Still, the winning bets are large enough to put the New York-based fund on solid footing to start the year. 

While the S&P 500 just eclipsed the 5,300 level for the first time ever on an 11% advance year-to-date, Harnisch’s skepticism persists. At the stock benchmark’s current altitude, more gains are unlikely this year, with valuations stretched, he says. As inflation softens and the economy slows, he expects 10-year Treasury yields to fall to 4% or even lower by December, a backdrop that bodes well for dividend-paying stocks such as utilities.

“It’s hard for us to conceive a market that’s going to run away to the upside,” said Harnisch, who started in the financial industry at Chase Manhattan Bank in 1968. “If the rates do come down, utilities probably would be a good place to be because you have a fundamental story on the economic side as well as a good story on the yield side.” 

The fund’s net leverage — a measure of risk appetite that takes into account long versus short positions — peaked near 50% earlier this year and has since dropped to 36%. Power producers now make up roughly 15% of its long book, a fairly audacious bet considering the industry represents less than 3% of the S&P 500.

The lack of enthusiasm echoes Wall Street strategists, whose average year-end target for the S&P 500 calls for a 4% drop through December. At the same time, it contrasts with hedge fund peers. Long-short funds last week boosted equity exposure, driving their net leverage to the highest level in more than two years, according to data compiled by Morgan Stanley’s prime brokerage unit. 

Harnisch, who started Peconic in 2004, says the renewed concern over inflation is likely overdone. The sanguine stance is a departure from the better part of the last two years, when he kept warning that the market under-estimated the risk of persistent pricing pressures. Now that the labor market is cooling, inflation will trend lower, he says. 

“When supply chain shortages began, all we were hearing about were price increases and we hardly hear any of that now,” he said, citing conversations with companies, while pointing to smaller percentages on new price hikes. “When there are increases, it is more ones and twos, not eights and tens.”

Back in January, the market veteran expressed concern over the stock market, saying hopes that the Federal Reserve would embark on a monetary-easing cycle as soon as March were misplaced. Bond traders have since pared back their bets on the size of interest-rate cuts for 2024 as the central bank held rates at a two-decade high. 

The bull market in stocks, however, rages on. 

Peconic focuses on discovering companies that will grow faster than the economy in the long run. On the short side, the team builds hedges to offset the risk from the core holdings while looking for mispriced shares. 

Harnisch calls GameStop Corp. a “tempting short” target, citing the risk that the video-game retailer may go out of business. But he has refrained from placing any bets given the stock’s prices are often detached from business fundamentals and instead driven by sentiment. This week, shares of GameStop led a surge in meme stocks following the return of Keith Gill to social media before plunging. 

With the goal to build a portfolio that stands to shine regardless of market conditions, Harnisch says he’s ready to double down on high-conviction bets. 

“We spend an inordinate amount of time because we want to know more about a stock than anybody else on the street,” he said. “We’re not dependent on the market.” 

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