Dalio caught flat-footed with big losses at Bridgewater fund / Risk parity funds suffer worst week since 2008

Jim,

Your favourite hedge fund Bridgewater Associates is having a tough time as both is risk parity (All weather fund) and marco fund (Pure Alpha) is suffering heavy losses.

Regards
James

Billionaire investor’s Pure Alpha Fund down 20% after coronavirus-induced market turmoil

Billionaire investor Ray Dalio said his Bridgewater Associates, the world’s largest hedge fund, was caught flat-footed during this month’s coronavirus-led market turmoil, as its marquee strategy dropped about 20 per cent for the year following sharp reversals in stocks, bonds, commodities and credit.

“We did not know how to navigate the virus and chose not to because we didn’t think we had an edge in trading it. So, we stayed in our positions and in retrospect we should have cut all risk,” Mr Dalio said in a statement to the Financial Times.

“We’re disappointed because we should have made money rather than lost money in this move the way we did in 2008.”

Bridgewater Associates’ Pure Alpha Fund II tumbled roughly 13 per cent this month through Thursday, according to two people familiar with its performance, following an 8 per cent drop in the first two months of the year. The firm manages about $160 billion, with about half in its Pure Alpha macro strategy.

The performance losses mark a low point for Bridgewater, which rose in stature after notching positive returns during the global financial crisis. They are a high-profile illustration of how the steep market falls caused by the coronavirus pandemic are hitting fund managers.

Pure Alpha employs a traditional hedge fund strategy that actively bets on the direction of various securities, including stocks, bonds, commodities and currencies, by predicting macroeconomic trends.

The strategy rewarded investors in 2008, gaining 9.4 per cent in a year when the S&P 500 index lost 37 per cent. It also outperformed the markets to a lesser degree in 2018.

Pure Alpha was largely betting on rising equities and falling Treasury prices entering this month’s market shock, one person briefed on the matter said. It also held put options on stock indices, which helped cushion the losses, the person said. Bridgewater has yet to release figures through the end of the week.

Last year, the Pure Alpha strategy was essentially flat, while Bridgewater’s All Weather fund, which uses a “risk parity” strategy that attempts to balance risk across a variety of asset classes throughout various market conditions, gained more than 16 per cent.

The S&P 500 index was down 23 per cent this year through Thursday but rallied more than 9 per cent on Friday as President Donald Trump declared a national emergency to help combat the coronavirus.

Benchmark 10-year Treasury yields recovered to almost 1 per cent on Friday after plunging to a record low of 0.318 per cent on Monday. The Federal Reserve announced it will start buying Treasuries across all durations, which led to yields rising at the end of the week.

Mr Dalio earlier in January urged investors to get off the sidelines and benefit from strong markets, telling CNBC in an interview that “cash is trash”.

Greg Jensen, co-chief investment officer of Bridgewater, told the FT in January that gold could surge to a record high above $2,000 an ounce as central banks embrace higher inflation and political uncertainties increase. “There is so much boiling conflict,” Mr Jensen said. “People should be prepared for a much wider range of potentially more volatile set of circumstances than we are mostly accustomed to.”

Gold prices have been highly volatile throughout the month, partly due to traders cashing in gains to offset losses in other markets.

Bloomberg first reported on the performance of Pure Alpha.

Risk parity funds suffer worst week since 2008

Popular strategy was poleaxed by the decline of both equities and US Treasury bonds

Risk parity funds, automated investment vehicles pioneered by the hedge fund manager Ray Dalio and designed to do well in almost any market environment, were among the big casualties of financial markets’ wild week, suffering their worst performance since the depths of the credit crisis and the second-worst on record.

The sharp losses came because one of the central ideas that underpins these funds broke this week: the prices of equities and low-risk US government bonds both went down, instead of going in opposite directions. When investors are selling risky assets such as stocks they are usually buying low-risk ones.

The most widely followed S&P 500 risk parity index tumbled 9.6 per cent over the five days, its steepest loss since 2008. The index goes back to 2004.

“It’s been a painful structure over the past few days,” said Scott DiMaggio, co-head of fixed income at AllianceBernstein, pointing out that a surge in volatility across financial markets triggered selling across all asset classes in risk parity funds, from government and corporate debt to stocks and commodities. “This cocktail is very bad.”

Pioneered by Mr Dalio’s Bridgewater Associates, risk parity funds and trading strategies have exploded in popularity over the past decade.

Like many funds, risk parity vehicles invest in a broad array of assets but they get their name because they try to keep the relative volatility of each component equal and constant. Bonds are less volatile than stocks or commodities, so risky parity funds typically use leverage to increase their exposure to safer fixed income, which should act as a counterweight if equities are rocky.

As markets churned this week, leveraged players faced margin calls, forcing them to sell even safer assets, fuelling the decline in Treasuries.

Among the biggest losers was the Wealthfront Risk Parity fund, which shed 23.2 per cent of its value from the start of the week. Others to suffer losses include the AQR Risk Parity II HV fund, which dropped 12.7 per cent, and the Putnam PanAgora Risk Parity fund, which shed 8.5 per cent.

Defenders of risk parity point to the staggering bull run in the Treasury market in recent months, as investors around the globe have sought the safety of US government debt at a time of uncertainty over coronavirus. Until this week, rising Treasury prices had inflated returns for risk parity funds and offset the early losses in equities.

“Bonds already did the diversification we are counting on them for,” said Roberto Croce, a portfolio manager for Mellon, where he runs risk parity funds. “The losses in fixed income are exceptionally muted after the gain they have made over the past month.”



I am rooting for you and Marco in this downturn. Looks like neither one of you were caught as “flat-footed” as Ray Dalio.

Best,

Jim

Jim,

Pls check your email box.

I have send you a message seeking your assistance on the eval function.

Thanks

Regards
James

Dalio isn’t the only one down 20%.

When I screen the Russell 3000, S&P 1500 and Nasdaq for recent lows only 20% or less off five year highs:

lowval(20,0)/highval(1250,0) > 0.8

I get 108 results. I have a feeling that number is going to shrink.