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:
“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.”
“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.”
“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”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.