After a Lackluster Year, Bridgewater Regains Some Ground
The world’s largest hedge fund firm just delivered its best returns in months.
Bridgewater Associates’ main strategies posted strong gains in April, putting them solidly in the black for the year.
The strong monthly performance also capped a double-digit gain for the 12 months following the sharp losses Bridgewater suffered at the beginning of the pandemic.
Bridgewater’s flagship Pure Alpha macro strategy, sometimes referred to as PA 18 Percent, was up 5.34 percent in April and 4 percent year-to-date, according to a person familiar with the results as well as a private database.
PA 12 Percent, which takes on less risk than the main Pure Alpha strategy, was up 3.5 percent for the month and 2.8 percent for the year.
Pure Alpha has now posted a 14.23 percent gain over the past 12 months.
All Weather, the firm’s beta strategy, was up 4.38 percent in April and 1.35 percent year-to-date. It was also up 18.81 percent over the past 12 months.
Bridgewater, the world’s largest hedge fund firm which is headed by Ray Dalio, generally points out that clients employ Pure Alpha as an overlay strategy, placing it on top of the benchmark of their choosing.
For example, in the 12 months through April 30, the S&P 500 was up 47.7 percent, while Pure Alpha was up an additional 14.23 percent.
Bridgewater’s Gains Come After a Disappointing Year
Still, some investors in Bridgewater’s funds were stung in 2020. Pure Alpha I and Pure Alpha II, lost 7.6 percent, and 12.6 percent for the year, respectively, according to a person familiar with the results.
Bridgewater declined to comment.
The firm told clients that Pure Alpha’s sharp gains over the past year reflect, at least in part, how well it has been prepared for what it believes is a developing paradigm shift in the economy and the markets.
Bridgewater explained in a March 2021 commentary that the new paradigm is the result of weak growth and secular disinflationary forces amid large promises — debt and government programs — and growing domestic and internal conflict at a point when central bank policy was near its limits.
The coronavirus accelerated the anticipated paradigm shift, the firm stressed. Bridgewater has previously said that Covid-19 took it by surprise and admitted that the firm wasn’t positioned for a pandemic.
“We expect that these new policies (fiscal and monetary) will last beyond the virus and how these policies are used will drive markets and economies going forward in a way that is different from past cycles,” Bridgewater added.
It stressed two new policy paradigms are needed to deal with these challenges — a more proactive fiscal policy and central banks lagging inflation and pushing as hard as they can to stimulate economies.
This is an environment of zero interest rates, which is destroying wealth through negative real yields, stated co-chief investment officers Bob Prince, Greg Jensen, and Dalio in a January 2021 global outlook. “And the printing of money to fund government debt — to augment lost income, not to make productive investments — is reducing the value of those currencies at a time when the nominal return from holding the bonds is near zero,” they added.
The pressure to borrow, print, and raise taxes will be with us until the monetary system breaks, they warned.
How the Pandemic Is Reordering Economic Power
In the January outlook, the Bridgewater executives discussed how the rebalancing of economic power between East and West, and between China and the U.S., has moved forward “at an accelerated pace” as a result of differences in the past year’s management of the virus “simultaneous with the money and credit flows associated with these policies creating forward prices that are discounting a reversal in those secular trends.”
They see “a growing and increasingly imminent risk” of real wealth destruction in the assets and currencies of those countries “that constitute the existing world order.” They also see developed economies experiencing a decade of low productivity growth.
In contrast, Bridgewater said economies in the East, especially in China, are poised for long-term productivity growth. These countries are also still in the earlier stages of their long-term debt cycles so they have more policy flexibility to stimulate growth and manage cyclical conditions.
These divergent secular forces also have big implications for asset returns and investing. “This at least calls for geographic diversification to balance the risks,” the Bridgewater execs stressed.
Institutional Investor earlier reported that at the end of the first quarter, Bridgewater was short U.S. Treasuries and had a small long position in Treasury Inflation-Protected Securities, or TIPS, according to a person familiar with the positioning.
The firm was also biased to the long side on commodities and equities, with two-thirds of its long equities book in Asia.
Bridgewater was also generally short the dollar and long the euro and yen and Asia in general, according to the source.
Meanwhile, Bloomberg recently reported that Jensen warned on a podcast that parts of the U.S. equity markets are in a bubble, but shorting too early is the “easiest place to die.”
He noted, for example, around 10 percent of stocks are pricing in more than 20 percent revenue growth and margin expansion. “If you look at history, 2 percent of stocks actually achieved that,” Jensen said. “That’s an extremely hard thing to do.”