Brevan Howard has said US policy makers still face the fundamental question of how to cut the country's deficit, rather than how to eradicate the impending fiscal cliff.
Speaking to investors in its listed BH Global - the hedge fund house which recently expanded back into America - said the fiscal cliff could easily wipe some four percentage points off real GDP, but this is not the core problem facing the US.
'The biggest issue is that the federal budget is on an unsustainable path,' it said and acknowledged the fiscal cliff, due to hit in January without political agreement, makes the issue more pressing.
Brevan stressed while avoiding fiscal contraction feels inevitable, cutting the deficit, which stands at some $11.45 trillion or about 72% of GDP, without triggering a recession is the problem no one has a solution for.
'Just letting the payroll tax cut end would shave nearly one percentage point from real GDP growth in 2013. If all the tax cuts expire and spending cuts occur as well, this would cause as much as four percentage points of fiscal drag, easily enough to cause a recession,' investors were told.
'The fundamental question is not how to avert fiscal contraction - that is going to happen regardless - it is how to cut the deficit in a way that does not cause a severe and immediate recession.'
'At his point, no one seems to have an answer to that question,' Brevan continued, adding uncertainty was 'definitely not resolved' by the November election and maintaining the status quo in terms of Barack Obama's leadership dashed the hopes of those expecting a honeymoon from partisan politics.
UK: no green shoots
In its update Brevan also turned its attention to the UK, warning the pull back in volatility following a rocky second quarter caused 'unjustified optimism', with this being fuelled by a 1% quarterly GDP growth rate.
'Any talk of "emerging from recession" or "green shoots" is misguided: the UK was never really in a meaningful double dip and there are no significant green shoots,' the fund house said.
'The overall picture is the UK's growth is somewhere between the US (growth a bit below trend) and the eurozone (recession).
'The domestic headwinds show no sign of abating: deleveraging across the private sector, banks and public sector are ongoing. Only an export led recovery could offset this, however the EMU [European Monetary Union] recession and associated uncertainty have made that all but impossible.'
BH Global, which is listed on the London Stock Exchange and gives investors exposure to a range of in-house hedge funds managed by Brevan Howard, is currently on an 11% discount.
According to Citywire data, shares in the fund have gained 6.78% in three years.