In the days after the August 24 ETFlash crash, the world's "risk parity" funds had a near-death experience when as a result of the furious disconnect between stocks, Treasurys and most other asset classes, the underlying correlation models failed, leading to dramatic declines for such giant funds as Bridgewater's $70 billion "All Weather" fund.
For now risk parity may be faring ok, but something else appears to have snapped at the world's largest hedge fund, or rather its more older "Pure Alpha" fund, which employs a traditional hedge fund strategy that actively bets on the direction of various securities, including stocks, bonds, commodities and currencies, by predicting macroeconomic trends. The fund, which manages over $80 billion, has returned 12.8 percent since inception in 1991 and had a 4.7% return in 2015 offsetting the 7% drop in the All Weather fund.
The problem is that Ray Dalio's stock picking, perhaps distracted by media coverage of the ongoing insider fight at the top, first reported by the WSJ on February 5, has not been doing too well as of late.
As the following monthly report shows, as of January 31, Pure Alpha fund was up a tidy 0.8%. Hardly bad in the current market environment.
It is what happened since then that is disturbing, because according to sources, the fund lost over 4% in the subsequent week ending February 5 when it was suddenly down 3.8% YTD, and was down more than 5% in the next week, pushing its total MTD loss to -10.0% as of February 12, and -9.3% YTD.
This means that in just 2 weeks, the fund which prides its lack of volatility and its Sharpe ratio, suffered a multiple-sigma volatility event, one which has seen it lose over 10%.
With the fund's AUM around $81 billion, it means Pure Alpha has lost over $8 billion through the middle of February, and is on deck for one of its worst months in recent history.
While we don't know if it is directly related, the sudden hit to Bridgewater performance may be linked to the unexpected blow up across the market neutral hedge fund space, which as we showed yesterday have suffered a dramatic hit to performance, one comparable to the market volatility in the aftermath of the Lehman failure and the August 2007 quant crash.
It may also explain the dramatic dislocation between the strongest and weakest momo stocks, which incidentally first materialized just as Pure Alpha started suffering this substantial underperformance.
We look forward to the next weekly update shortly, at which point we hope to report if Pure Alpha managed to regain some of the dramatic losses suffered at the beginning of the month, or if the losses have inexplicably continued and are the cause for the ongoing market-neutral freak out. If it is the latter, we expect Bridgewater's "Pain Button" app to have hit a record of "Angry", "Frustrated" and "Sad" hits in the month of February.