THE INTERESTING CASE OF BRIDGEWATER ASSOCIATES


History


Raymond Thomas Dalio, popularly known as Ray Dalio, is an American billionaire hedge fund manager and philanthropist. He founded Bridgewater Associates in 1975. His estimated net worth is $18 billion. He is ranked as the 69th richest person in the world. His company is estimated to have $160 billion assets under its management. He is one of the greatest investors in the modern times.


Ray Dalio founded Bridgewater Associates, an American investment firm, out of his two-bedroom apartment in New York City. Initially the firm was started as an institutional investment advisory service but later developed into an institutional investing business and in 1996 started the risk parity investment approach.


Bridgewater Associates – the world’s largest hedge fund serves institutional clients including pension funds, endowments, foundations, foreign governments, and central banks. Its functioning is based on a global macro investing style that utilises economic trends such as inflation, currency exchange rates, and U.S. gross domestic product. In 1981, the company’s headquarter was moved from New York to Westport, Connecticut. The firm developed various industry strategies such as: the separation of alpha and beta strategies, the creation of absolute return products, and risk parity.

Phase I: 1975-1990

In the beginning Bridgewater Associates’ business focused on advising corporate clients and the management of domestic and international currency and interest rate risks but later the firm changed its emphasis on selling economic advice to governments and corporations such as Nabisco and McDonald's.


In the early 1980’s, the company started publishing a paid subscription research report called the Daily Observations which inspired McDonald's Corp. and its main suppliers to become its clients. Its another client was Banks of Mid-America. In 1987 US$5 million fixed-income investment through Hilda Ochoa Brillembourg of World Bank become Bridgewater Associates’ first account funding and the change for the company happened in the mid 1980’s when it shifted from fixed income and currency adviser to institutional clients as it changed its business focus from currency and interest rate management to global bonds and currencies for institutional investors .


In 1990, it launched a hedge fund portfolio using monies from Kodak and Loews Corporation and began formally offering its currency overlay products to its clients.


Phase II: Post 1990

During the 1990s the company developed various innovative investment strategies that helped it gain a lot of reputation in the market. The investment strategies that were developed includes inflation-indexed bonds, currency overlay, emerging market debt, global bonds and super-long duration bonds and it is in this face when the firm pio

neered the separation of alpha and beta investments and developed an alpha overlay strategy.


In 1991 the firm launched Pure Alpha fund and started marketing portable alpha investment strategies and as hedge fund become more popular, the company started expanding its assets using its big clients and connections.


It was in 1995, when the company’s executives advised federal government on the development of inflation indexed bonds in the discussions at the U.S. Treasury. In 1996 , the company launched All Weather hedge fund and developed the risk parity approach to portfolio management . In 2006, the company's flagship Pure Alpha fund began returning money to its clients in order to maintain its investment strategy and enforce its capacity limit. The firm began moving all of its clients into alternative strategies, thereby eliminating the traditional investment approach from its portfolios.


Recognition

Bridgewater associates gained a lot of limelight when it was ranked as the best performing global bond for six consecutive years from 2000 to 2006 by Pensions & Investments magazine. Apart from this Nelson information ranked it as the World's Best Money Manager in recognition of the 16.3% return on its International Fixed Income program in 2002.


According to a 2007 article in Barron's magazine, nobody was better prepared for the global market crash than its clients and subscribers to its Daily Observations. The company began sounding alarms in the spring of 2007 about the dangers of excessive financial leverage. In that phase the company didn’t fail to impress the world with its Judgment about the crisis.


Ray Dalio’s investment ideology and strategy


Here are some of his best advice and strategies –


Analyse Macros

Always study the economy as a whole. Analyzes world economies and then decides where to invest and how much to invest. Manage his portfolio accordingly by analyzing different economies.


Diversified portfolio

Always have a diversified portfolio, don’t invest in stocks only rather invest in bonds, gold, silver, mutual funds, sip, F.D. Also have a goal and then decide how much risk you can bear before diversifying your portfolio. Many people think that keeping cash in their hand can make them financially strong, but that is a wrong perception because over a period of time due to the inflation the cash in hand losses its value.


Saving is Freedom and Security

Think about your savings and how much money you have for savings i.e. is think how much money you spend this month and how much money you saved. You need to calculate that for how many months you can rely on your savings without any income. Savings give you freedom and sense of security.


Be cautious about debt

Before taking a debt think that is this debt going to generate an income, for example by investing in assets using debt money which give more return than the cost of debt. Also think that is this debt going to help my savings. Using debt for personal consumption is a bad idea. Always try to minimise the need of debt.

Understand market cycle

one must study historical patterns for a better investment opportunity. After a big crash economy gives a great opportunity to earn big returns. The one who stays in the market has a chance to earn. According to Ray Dalio- always do opposite of what your instincts says. Sell when everyone wants to buy and buy when everyone wants to sell.


Asset holdings


The firm offers three hedge funds: The Pure Alpha fund, the All-Weather fund and the Pure Alpha Major Markets fund. It also publishes a white paper, called the Daily Observations.


Pure Alpha

Bridgewater Associates launched its flagship fund, Pure Alpha, in 1989. The fund is described as a "diversified alpha source" that invests across a group of asset classes. It was designed to balance risk amongst a variety of non-correlated assets through active management. It includes 30 or 40 simultaneous trading positions in bonds, currencies, stock indexes and commodities to avoid affecting prices by concentrating funds in a single area. After placing some of the company's excess cash into the Pure Alpha hedge fund to increase its "investing discretion". The fund was closed to new investors in 2006 when it reached its pre-determined, maximum funds level. As of 2019, the fund is reported to have lost money in only three of its 20 years of existence and had an average annualised return of 12 percent.


All Weather

The All-Weather fund was launched in 1996 and highlighted low fees, global inflation-linked bonds and global fixed-income investments. The fund began as the founder's personal trust fund and was subsequently opened to clients. The goal of the fund was to create "high, risk adjusted returns" that exceeded the return of the general market. The All-Weather fund contains more than $46 billion and is one of the largest funds in the U.S. as of 2011. In April 2009, after the collapse of Lehman Brothers, the fund moved into "safe portfolio" mode which included nominal and inflation-linked bonds and gold instead of equities, emerging market debt, and commodities. The fund is reported to contain 40% inflation-linked bonds, 30% Treasury bills, 20% Treasury bonds and 10% gold. In October 2018, Bridgewater launched its first Chinese investment product, ‘Bridgewater All Weather China Private Fund Number 1’.


Pure Alpha Major Markets

Under the guidance of then co-CEO Jensen, the firm created the Pure Alpha Major Markets in 2011 with $2.4 billion from existing clients. In 2011 the fund was opened to a group of outside investors who had made a total advance commitment of $7.5 billion. At that time, it was reported to be the largest hedge fund launch. The fund was established to provide an investment vehicle similar to the company's Pure Alpha fund but with enhanced liquidity by focusing on the major markets such as European bonds. The launch of this fund in 2011 brought the company’s total assets under management to more than $100 billion.


Daily Observations

The company's "Daily Observations" is a private communication and is the flagship product and service offered by the company. The daily notes synthesise Bridgewater's decades of following the markets and offer an alternative perspective on trends that are top of mind for all investors around the world.


Bridgewater Associates is based out of Westport and is run by Ray Dalio. Bridgewater Associates is a hedge fund with 103 clients and discretionary assets under management (AUM) of $235,612,089,890. Their last reported 13F filing included $5,961,121,000 in managed 13F securities and a top 10 holdings concentration of 76.01%. Bridgewater Associates’ largest holding is SPDR S&P 500 ETF TRUST with shares held of 5,045,646. Bridgewater Associates has met the qualifications for inclusion in our Whale Score system.

Bridgewater Associates asset holdings

Competitive Analysis


Bridgewater is unique in its operating model that, unlike many other investment funds where each investment managers makes his/her own decision, Bridgewater makes investment decisions collectively as an entire organisation. Moreover, the employee compensations are largely based on the performance of the firm’s performance and not an individual performance metrics, unlike many other hedge funds that compensate on individual performance basis. Bridgewater is also known for its corporate culture that encourages extreme transparency and the elimination of the decision-making hierarchy.


These operating model enables Bridgewater to fully utilize its intellectual capital and outperform the market, thereby supporting its business model. By making investment decisions together as a firm, Bridgewater incorporates more intellectual capital into investment decisions than typical funds do. By tying the employee compensations to the entire firm’s performance, Bridgewater incentives employees to fully contribute their insights into investment decisions. Furthermore, by encouraging transparency and eliminating decision making hierarchy, Bridgewater prevents politics to intervene in the transformation of intellectual capital into investment decisions. Bridgewater even records and stores most of its meetings, thereby facilitating the intellectual capital accumulations. In these ways, Bridgewater’s operating model supports its business model of transforming the intellectual capital into well-reasoned decisions and gives them competitive advantage in investments. This operating model also gives sustainable competitive advantage because the culture of extreme transparency and anti-hierarchy attracts those unique talents who are willing to enjoy these collective knowledge-buildings.


The implication of this well-aligned business and operating model is a great investment return in the long-run. In fact, in the 37 years since Ray Dalio founded the Bridgewater Associates, Bridgewater had grown to approximately $120 billion in assets under management in mid-2012, with an excellent track record.

Bridgewater Associates leading the Hedge fund Industry

Competitors


Renaissance Technologies

Renaissance Technologies has over 30 years of experience in building out a pipeline, starting from the simple and commoditised markets for commodities, eventually growing to stocks and complex derivatives. Other companies have mastered the data pipeline, but not effectively in the domain of hedge funds The crown jewel of Renaissance Technologies is the Medallion Fund. The fund is open only to employees and has outperformed the market for nearly 30 years. The Medallion Fund has grossed over 66.1% average annual return since 1988 netting investors 39.1% average annual return after heft management fees.


AQR Capital Management

Asness’ AQR Capital Management earned $530 million in 2016 on revenues of $941 million, the SEC filing shows. AQR’s revenues also beat those of the world’s biggest publicly traded hedge fund firm, Man Group, which lost money last year on $827 million of revenues.

The growth has come from Asness’ decision to move aggressively away from traditional hedge funds and into lower-fee products, including mutual funds, that emphasise factor investing and what has become known as smart-beta.


Man Group

Headquartered in London, Man Group is the third-largest hedge fund operator with more than $62 billion of assets under management. It provides a range of funds to institutional and private investors. The company has offices around the world including Hong Kong, New York, Tokyo, and Sydney.


De Shaw

Founded in 1988, we focused primarily on quantitatively-based investing. Over the years we have diversified so that today we are active in a much broader array of asset classes and investment strategies, including macro, energy, credit, futures, options, private equity, venture capital, and more. Quantitative techniques remain a central focus of the firm's activities, and are used to identify underpriced and overpriced instruments, to manage portfolio risk, and to reduce the costs of transacting.


DE Shaw’s performance numbers are already the stuff of legend: “Last year its flagship $14bn Composite Fund — which has been closed to new investors since 2013 — returned over 11 per cent to investors net of fees, despite the turmoil in financial markets. That was its seventh double-digit gain of the past decade, over which period it has not suffered a losing year. Its $7.6bn “macro” fund, Oculus, returned 5.9 per cent in 2018, and the $7bn stocks-focused Valence made 8 per cent.”


2008 Subprime Crisis

The United States subprime crisis lasted from 2007 to 2010. It was a nationwide crisis, and also contributed to the US Great Recession. It was triggered by a steep fall in house prices after the bursting of the housing bubble. It led to foreclosures, mortgage delinquencies (late/no mortgage repayments), and fall in value of housing related securities. As a result, residential investment declined and were followed by reduced household spending and business investment. It was more significant in areas where there was a combination of higher household debt and a bigger decline in prices of houses.


The housing bubble which triggered the crisis when it burst was financed by mortgage backed securities and collateralized debt obligations which offered higher return than government securities and attractive risk ratings. The main reasons for this were the rise in subprime lending and increase in housing speculation. These occurrences were part of a trend of lowered standard of lending and high-risk mortgage products, which led to household debt increasing. When the prices decreased drastically in 2006, it became difficult for borrowers to refinance loans. As adjustable rate mortgages increased interest rates, mortgage delinquencies increased. Securities backed mortgages, including subprime mortgages, lost most of their value.

Global Hedge Funds declining because of Subprime Crisis

HANDLING THE CRISIS


Bridgewater Associates came up with various investment strategies during the 1990s which were said to be innovative and included global bonds, inflation-indexed bonds, etc. The firm was also the market leader in terms of the separation of alpha and beta investments and developed a strategy called Alpha Overlay which was a combination of twenty unconnected investments, to leverage risk and return. The firm launched its flagship fund, Pure Alpha, in 1991 which invested in thirty to forty unconnected fields across all asset classes to avoid concentrating funds in a single area. It was designed to balance risk through active management. The fund worked well during the market downturn from 2000 to 2003. As hedge funds became more popular, the company also invested in various underfunded pension programs. In 2006, the Pure Alpha fund began retuning money to its clients to maintain their capacity limit and investment strategy. They were also moved into alternate funds such as the All-Weather fund or the Pure Alpha Major Markets fund.


This helped in eliminating the traditional investment approach from Bridgewater associates’ portfolio. By 2007, the hedge fund was warning its clients and subscribers to its Daily Observations regarding the global market crash. The company began to warn about the possible dangers of excessive financial leverage in early 2007. According to the company’s researchers, the estimated future losses based on the public accounts of major financial institutions around the world came to $839 billion. Bridgewater’s investors were spared from most of the stock market meltdown in 2008 due to the Pure Alpha fund. However, this did not work in 2009 when economic growth was faster than expected. Though the Pure Alpha fund did gain, it was only 2-4% against Dow Jones’ increase of 19%. However, the Pure Alpha II has posted an average return of 10.4% historically. In February 2009, Ray Dalio, the company’s founder, began using the term ‘d-process’ to describe the deflationary and deleveraging process of the subprime mortgage industry as distinct from a recession. Bridgewater’s growth also helped it to become the largest hedge fund is the US in 2009. When the US GDP fell in 2010, the firm had gained significantly on their investments in treasury bonds and other securities.


Lawsuit


Former Bridgewater Associates’ co-chief executive officer Eileen Murray has filed an updated version of her complaint against the hedge fund firm, with fresh allegations of "brazen hypocrisy" at the $140 billion asset manager. In late July, Murray filed a lawsuit against Bridgewater, alleging that the firm withheld her deferred compensation after she disclosed their ongoing gender discrimination, unequal pay, and breach of contract dispute to the Financial Industry Regulatory Authority. Murray was recently tapped to become the chairperson of the regulatory organization, known as FINRA. In an updated version of that earlier complaint, Murray accused Bridgewater of “publicly avowing transparency when it suits its interest, but seeking to harshly punish those who publicly report facts, which Bridgewater perceives to be damaging to its image.”

Eileen Murray

Murray’s legal team filed the amended complaint on Tuesday with the United States District Court of Connecticut, which clarifies the specific legal grounds for the lawsuit. Murray is alleging that Bridgewater violated the Employee Retirement Income Security Act (ERISA) and the Connecticut Unfair Trading Practices Act. She is seeking a declaratory judgment from the court that says her public disclosures about her gender discrimination and breach of contract dispute with Bridgewater do not allow the firm to forfeit the deferred compensation. She is also seeking injunctive relief from the court, with the goal of stopping Bridgewater from “threatening to cancel, forfeit or otherwise deprive” her deferred compensation benefits. Murray estimates that she is owed between $20 million and $100 million for deferred compensation benefits she earned in 11 years of working at the firm.


According to her initial complaint, Murray told FINRA about the dispute. Once she also told Bridgewater about the disclosure, the firm allegedly responded by telling her that by doing so, she forfeited her deferred compensation from the firm. Murray’s updated complaint also includes new claims against the firm. It alleges that Bridgewater defamed Murray by “making the false public statement that there is ‘no merit’” to Murray’s public disclosure of her dispute with Bridgewater. Murray also alleges in the suit that Bridgewater is “improperly and falsely” using her photo on its website, claiming that Bridgewater is holding her out “as a public endorsement of the fair and inclusive treatment that employees receive at Bridgewater.”



Bridgewater Associates Research Article
Download • 1.33MB


10 views

Related Posts

See All