BRIDGEWATER: BETTING ON THE D-PROCESS
There is a great article in today’s Wall Street Journal regarding Bridgewater (the world’s largest hedge fund) and how they’ve managed to guide a $86B fund through this market. Their flagship fund is up an astounding 38% this year. How did they do it? They’re betting on what Ray Dalio, the firms founder, calls the “d process” – the de-leveraging process. Ray Dalio has long said that the global economy was experiencing its first real de-leveraging since the great depression and he’s been putting his money where his mouth is by betting on macro trends that perform well in such a scenario.
Their big bets:
1) Treasuries
“One of Bridgewater’s biggest gains came from its bullish investment in Treasurys, says Mr. Jensen. The fund believed demand for such government bonds would remain high as investors sought safe returns amid heightened economic uncertainty. In the spring, when some investors thought signs of economic growth would prompt the Federal Reserve to raise interest rates, Bridgewater stuck by its thesis that rates would stay near zero and Treasurys would remain attractive. The Dow Jones CBOT Treasury Index is up 12% this year.”
2) Japanese Yen
“Also helping drive Bridgewater’s returns: a bullish investment in the Japanese yen, which has risen nearly 16% since May. The yen’s rise is being driven by a weaker dollar and China’s recent purchases of the Japanese currency.”
3) Gold
“Another big moneymaker has been gold, a commodity that has risen roughly 20% in value this year as investors flee major world currencies in decline.”
4) Leverage
“Like many macro hedge funds, Bridgewater uses leverage to amplify returns. Mr. Jensen called Bridgewater’s leverage a “moderate, controlled amount that has been tested through many crises, including 2008.”
What is their outlook currently? Bridgewater sees a higher risk of deflation than inflation in the US with China leading the global economy:
“Looking ahead, Mr. Jensen says deflationary pressure will continue to outweigh inflation concerns in the U.S., and he expects the Fed will have to do another round of quantitative easing—increasing the money supply to stimulate the economy—even after the $500 billion move that is expected in the near term.
Meanwhile, the economies of developing nations like China will keep getting stronger, while the U.S. stays relatively weak”
Source: WSJ
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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10 Comments
Amazing that they could generate such high returns within such a huge fund. That’s almost incomprehensible.
So this guy basically has the same view as mine in terms of a stronger China and a relative weak U.S., I’m betting on that.
The whole damn world has believed this for years. You’re not exactly alone.
This is probably the best fund in the world, with the smartest guy and the best management, and the best clients, cause they trust him to have absolute return metrics. Still, the numbers don’t add up. Unless they’re at 100% leverage, which I can’t believe, because they’re responsible to pension funds and sovereign wealth funds, then none of their investments individually comes close to their yearly profit, let along all of them. There is something else coming in at maybe 50% or even much higher profit that’s pulling them all up to a combined 38%. Gotta be the kind of short term commodity/currency trades that only folks with great bench strength and heavy computer use can pull off.
They’re probably using options and other instruments that are technically lower risk leverage.
But yes, they’re either taking much more risk than advertised or they’re making their money in something else.
“” 4) Leverage
“Like many macro hedge funds, Bridgewater uses leverage to amplify returns. Mr. Jensen called Bridgewater’s leverage a “moderate, controlled amount that has been tested through many crises, including 2008.” “”
The answer is right there… I use leverage all the time, going on 42 years now. Therefore, I just expect the large successful funds to use it.
He probably went long the 30yr which gives you a pretty good deal of leverage and it’s a pretty liquid market (700,000 contracts in the front month) and the currency markets are massive so he could deploy capital there. With a fund like that it seems he would have to be in big liquid markets to move the needle much. With a fund that size it would be hard to have a big move by betting big on orange juice futures or something.
TPC – Are you still staying short here with the recent ramp up from earnings reports? I just have a hard time seeing how the multiples of a lot of these companies, and a lot of commodities, are going to be able to justify some rather parabolic moves. Unless we are in a “new paradigm”; which a lot of people like to say.
The mkt is flat since I went short at around 1180. I feel very comfortable being short into the next few weeks. I know there is potential for more upside as investors continue to buy in front of the election, earnings and QE2, but ultimately I think we could break down 5% or more. I actually like the short here so much that I wouldn’t mind the market moving higher. It would allow me to add to the position. This is a multi month trade, however, so I’m unlikely to revisit the position until late November at the earliest. I certainly don’t want to be a buyer here. My risk metrics are all through the roof. If the mkt begins to latch onto any bad news we could tumble quickly.
What happens when Bridgewater and others unwind these trades all within a 48hr period? I wouldn’t want to be in the way of that move.
Yeah, this is a very interesting question, how does one bet specifically on de-leveraging.
Kudos to this guy for figuring it out, and the fact that he’s financing the de-leveraging which is needed anyway by longing it.
Walden, why don’t you think he is leveraged? He could also be trading leveraged derivatives.