What Happened to Dalio’s Pure Alpha II Fund?
Dalio’s $148 billion Bridgewater Associates has run up hefty losses this year, even as rivals have minted money in the topsy-turvy markets. The damage as of August: an 18.6% drop in the flagship Pure Alpha II fund. Rivals including Caxton Associates and Brevan Howard Asset Management have posted double-digit gains.
Unlike rivals such as Renaissance Technologies use math-heavy quantitative methods, Dalio has built his firm and fortune on models that treat economics as a discipline akin to the timeless laws of physics.
So what caused the underperformance?
- It’s a mistake that recalls the firm’s approach in January last year, when Fed Chairman Jay Powell signaled he’d do whatever it took to keep the economy growing. Having made 14.6% in 2018 mostly thanks to forecasting December’s market meltdown, Bridgewater failed to switch its portfolio to a more bullish position and lost just over 5% in the first two months of 2019. In response, it tweaked its models to better respond to the paradigm shift.
- Bridgewater’s computer models initially misread the markets for a second year in a row. Then, big clients began to head for the exits. Investors pulled a net $3.5 billion during the first seven months of the year. Industry consultants expect more to follow.
- Compounding the performance issues, however, are personnel disputes. Former co-CEO Eileen Murray sued Bridgewater in July over her deferred compensation, and alleged gender discrimination in an ongoing battle over her departure package.
After central banks around the globe flooded markets with liquidity in response to the Covid-19 pandemic, Bridgewater investment staff worked again to change the models, this time to account for the unprecedented intervention and the near-complete shutdown of the world’s major economies. They spent more than a month turning off strategies they didn’t think would work in the new environment, and tweaking ones they believed were applicable.
This year’s changes to the models could eventually pay off—Bridgewater has famously thrived after downturns despite struggling at first. While it lost 20% during 2008’s financial crisis, it gained 45% and 25% in 2010 and 2011, respectively. And after losing 22% in the dot-com crash of 2000, it posted three straight years of returns over 20% from 2002.
The fund delivered annualized return of 10.4% gain since 1991.
Fortune, 2020-09-15, “The losses continue to pile up for hedge fund king Ray Dalio”
