Monday, April 22, 2024

Bridgewater: "Ray Dalio’s Famous Trade Is Sputtering and Investors Are Bailing"

 From Bloomberg via Yahoo Finance, April 22:

It was an irresistible pitch. Give us your money, executives at Ray Dalio’s Bridgewater Associates and other hedge funds said, and we’ll funnel it into a money-minting, sure-thing strategy for the long haul. But now, after five years of sub-par returns, many of the institutional investors who sunk large sums into risk-parity funds, as they’re known, are demanding the money back.

Investors including public pensions in New Mexico, Oregon and Ohio have yanked out cash, slashing the size of the funds by an estimated $70 billion from their peak three years ago. For many, the pleas from firms for more time — that the next decade in markets is unlikely to resemble the last — ring hollow.

“It’s been disappointing for a long time,” said Eileen Neill, managing director at Verus Investments, an adviser to New Mexico’s roughly $17 billion public employee pension, which axed its risk-parity allocation in December. “The only time risk parity was really successful was at the time of the Great Financial Crisis and that was really its heyday.”

The lackluster run through the post-pandemic booms and busts has rattled faith in an allocation method pioneered by Dalio, who built Bridgewater into the world’s largest hedge fund. The strategy focuses on diversification across assets based on how volatile each is, and often uses leverage to optimize returns relative to the risks taken.

It flourished after the 2008 financial crisis as investors sought a way to protect themselves from the next big cataclysm. But as investors went on to plow back into stocks, they lagged in the up years. Then when markets cracked in 2022 — pummeling safe assets like US Treasuries — they were hit even harder.

All told, risk parity funds have lagged global 60/40 funds every year since 2019, according to a broad index of the industry.

That’s driven investors to pull out cash, cutting the amount in such funds to about $90 billion by the end of 2023 from a peak of about $160 billion in 2021, according to Verus estimates compiled from eVestment data.

First launched in 1996 to manage Dalio’s trust assets, it was billed as a way to use deep economic research to craft the best possible portfolio, instead of trying to call the next big thing.

Rather than pile on risk to chase big returns, the strategy generally involves diversifying across a broader array of assets like commodities and bonds and making each an equal driver of the portfolio’s volatility. To keep the risks balanced, the exposures can be dialed up or down based on how much prices are swinging around, making the strategy Wall Street’s favorite scapegoat in a selloff.

A Tough Environment
To the strategy’s proponents, the decision to bail just as stock prices hit new records reflects a classic investing error.

“That really is reasoning from the past decade, which I will claim is more exceptional,” said Otto van Hemert, director of core strategies at Man AHL, which runs about $15 billion in risk parity....



Some of our posts on Bridgewater and/or its founder. Most recently:

Ray Dalio: "Are We In A Bubble?"

He says no but he was also pushing investments in China* that are now down 50 - 60%. 

He's such an odd duck. I mean most multi-billionaires are odd ducks, it's sort of a prerequisite for the self-made or a condition of employment for inheritors but even in this cohort he sticks out.

I on the other hand think things are bubbly but will get even more bubblicious as long as "the grass shall grow and excess liquidity flow." (apologies to all the U.S. - indigenous treaty writers of a couple centuries ago) 
And embedded therein: 
"Is Dalio's Bridgewater A Fraud? Here Are The Troubling Questions Posed By Jim Grant"—UPDATED II
Bridgewater, World’s Largest Hedge Fund, Is Building An Algorithmic Model Of Ray Dalio's Brain
Frederick Taylor and Ray Dalio's Brain: "Working for an Algorithm Might Be an Improvement"
Bridgewater's Ray Dalio Really Didn't Like The Wall Street Journal Story on His Brain (he's also against fake news)
"Why Ray Dalio is wrong about China"
Speaking of China, Bridgewater's Ray Dalio Has Some Thoughts
"Western Greed Fuels China's Domination"
It's good to name names. Unfortunately Dalio, Dimon, Fink and Cook sounds like the law firm from hell....

If interested see also:

September 2021: "Dalio’s Hedge Fund Risks Being Dumped by Pension on Weak Returns"

March 4, 2019
Bridgewater's Dalio Cuts His Odds of a Recession Occurring Before the Next U.S. Presidential Election.
Our bet, from two years ago had the U.S. stock market peaking this year and a recession to follow in 2020.
We'll be revisiting that prognostication....

"Why Ray Dalio is wrong about China"
No, not because of "Chinese Hedge Fund Jumps 258% After Dumping Ray Dalio’s Strategy"