FinAlternatives is reporting that Ray Dalio’s massive hedge fund, Pure Alpha II, is up 25%+ this year. For those who aren’t familiar, that’s the world’s largest hedge fund at $122B steering itself to a smooth 25% YTD gain. At first, this appears unfathomable. How can such a large fund steer itself around like a jet boat when it is in fact a battleship? When you begin to understand the methodology behind Bridgewater’s approach you begin to see why this is possible.
As a macro fund, Bridgwater isn’t dealing in illiquid individual securities. They’re dealing in the world’s largest and most liquid markets. So while $122B might seem like a big figure, they’re really placing macro bets in markets that are hundreds if not thousands of times larger than they are. They might be a big fish in the hedge fund world, but they’re a small fish in the markets they deal in. And that’s part of the genius behind their approach.
We can connect the dots on much of their success this year by looking at some of their larger holdings. Earlier this year Bridgwater disclosed some of their larger 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.”
Not surprisingly, those have all been brilliant macro plays this year. Long Treasuries are up 22%+ YTD, gold is up 29%+ YTD and the Yen has risen 5% against the dollar. Throw in a little “controlled” leverage and we can begin to see how Bridgewater gets to their 25%+ gains. As value funds suffer through the Great Recession, Bridgewater is just more evidence of the importance of macro.
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.