World's Largest Hedge Fund In Trouble? Bridgewater Pure Alpha Loses Over 10% In Two Weeks

Tyler Durden's picture




 

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.

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Thu, 02/18/2016 - 11:33 | 7202041 Wow72
Wow72's picture

Ray Dalio is smart enough to OWN GOLD.  Wait till eveyone else starts losing.

Thu, 02/18/2016 - 11:42 | 7202088 MillionDollarBonus_
MillionDollarBonus_'s picture

Ray Dalio warned our Federal Reserve that there would be consequeces if quantitative easing was not reintroduced. Unfortunately, our monetary officials weren't listening, and now the people are paying the price. Austerity doesn't work - just ask Europe; the ONLY thing that works is monetary and fiscal stimlulus.

Thu, 02/18/2016 - 11:51 | 7202135 lordbyroniv
lordbyroniv's picture

u blow your dad with that mouth?

Thu, 02/18/2016 - 12:04 | 7202186 NoDebt
NoDebt's picture

The Bilgewater Pure Negative Alpha Fund.

Thu, 02/18/2016 - 12:09 | 7202243 Arnold
Arnold's picture

It is a confidence builder for me.

I, too, could loose 10% of my fund in two weeks.

Thu, 02/18/2016 - 12:32 | 7202384 aVileRat
aVileRat's picture

Yeah, no shit. When you scale your strategy from 4 billion to north of 50 things naturally break down, like finding a market big enough to take down profit moving trades. Bridgewater itself straight up admitted at Davos in 2015 that the entire 'all weather' was simply selling vol and buying at HFT clips. I'd arge given how active the Bridgewater churn is on a daily basis, most of this chop must be 'all weather' funds trying to cover positions as the correlation strategy breaks down. Which would only be compounding the 3 sigma moves in market stochastics.

Thu, 02/18/2016 - 12:42 | 7202444 Groundhog Day
Groundhog Day's picture

Thier was another hedge fund manager who ran a 50 billion dollar fund for many many years delivering a consistent 12% a year or a nice 1% a month return.  Investors loved it for its stability.  People would often beg him to take their money as he was so successful at delivering great results in up and down markets.  

I wish i could remember his name?

Thu, 02/18/2016 - 11:52 | 7202140 CarpetShag
CarpetShag's picture

Fuck off. Your comments were amusing a few years ago but you are now a has-been.

Thu, 02/18/2016 - 12:05 | 7202213 Wannabe_Oracle
Wannabe_Oracle's picture

Better to be a 'has-been' than a has-never. ./

Thu, 02/18/2016 - 12:07 | 7202219 NoDebt
NoDebt's picture

Oh, come on.  That's a bit harsh.  If he's a "has been" it's for the same reason The Onion is struggling.  Reality has caught up to even the most outrageous of satire.

Thu, 02/18/2016 - 11:54 | 7202144 Hohum
Hohum's picture

So true, MDB.  The only solution is to have nominal debt increase faster than nominal GDP in perpetuity.

Thu, 02/18/2016 - 11:59 | 7202176 SoilMyselfRotten
SoilMyselfRotten's picture

One day we will all be MDB acolytes

Thu, 02/18/2016 - 12:04 | 7202173 Wow72
Wow72's picture

If only human nature and GREED would allow us to appropriately disperse the funds in a fair and balanced matter... it would work.... LOL LOL LOL LOL.  But HUMAN NATURE WONT ALLOW IT!  As we currently can SEE if we are not blind.  This cant work with the Greed we have in this system... ITS DONE... COOKED... OVER....

 

You need Humility and Integrity to achieve the goals you aspire for.   We aint got it.  What we got is a REAL KEYNESIAN PIPE DREAM... GOING UP IN SMOKE!

Thu, 02/18/2016 - 12:25 | 7202295 Wannabe_Oracle
Wannabe_Oracle's picture

What strain are you currently using - just curious. Some advice, if interested, you do not have to utilize all capital words to communicate your emotional frustration (valid feeling(s) given the current times we find ourselves). That said, is it possible to emphasize feeling with meaningful and articulate word, instead of those blazing CAPS,.? ./

:-)

 

Thu, 02/18/2016 - 13:33 | 7202409 Wow72
Wow72's picture

My favorite is Pineapple Kush.  Great strain..  I have others Vortex, Hippie Killer, Grape Gum, White Rhino depends on the day... I dont drink alcohol and havent for at least a decade... Im working on the caps I just dont care what people think, but I do appreciate feedback and argument so for that Ill try.  If I care what you think about my typing, then Ill care what you think about my thoughts... and I dont want to care what you think about anything and not to be rude, just in a thought sense I want "Free" thought, so I dont give a flying fuck what anyone else "Thinks" so nothing personal really, its just a state of being Im trying to reach... Its a tough place to get to and it doesnt mean I dont listen an change my thoughts based on others thoughts.  If I think someone has a better thought than I do Ill try it on and see how it feels?

But Im very "Free" in my thought, not always right just trying to inch closer. Perfect! Not being liked is where I like to be sometimes, its its own freedom.

Its about telling people what they Need to hear .vs what we want to hear.  Which by not caring means I really care.  When you tell someone what they need to hear you care about them even though it may sound like you dont.  When we talk about the things we need to talk about we make progress and they are never the things we want to talk about.  If I really cared what people thought, Id still be drinking.

Thu, 02/18/2016 - 11:42 | 7202090 remain calm
remain calm's picture

Ray is a very smart guy, but how smart can he really be, HE IS A FUCKING KEYNESIAN. He will have to admit that its a failed economic discipline before I put him Kyle Bass class.

Thu, 02/18/2016 - 11:53 | 7202128 Wow72
Wow72's picture

Do Keynesians believe in GOLD? I didnt realize you could do both.  Maybe his investment in gold was an indication he really didnt "believe"?  "Smart" people saw this coming from a mile away.

Thu, 02/18/2016 - 15:46 | 7203547 Big Stapler
Big Stapler's picture

Bridgewater bought tens of billions of US Treasuries (on leverage), while buying a relatively small token amount of gold (and most of it is ETF's, not actual gold bullion).

The guy just rode the coat tails of the Fed cornering the Treasury market. There are thousands of "masters of the universe" all over Wall Street who did the same thing -- and now that the Fed stopped rigging Treasuries, the other levered bond guys aren't faring well either.

If you have an economy "growing" 1-2% per year (mostly from debt spending, and before subtracting cost of living changes) -- and you lever that up five or ten times, you get a fund with the same stagnant growth as the economy it is invested in.

If the US economy remains stagnant, so will all the portfolios that are levered trades on stagnant growth. DUH!!!

Thu, 02/18/2016 - 19:16 | 7204457 Wow72
Wow72's picture

I know Im just saying at least he hasnt been on the gold bashing team and he does recomend having 5% to 10% in gold for protection, which on its own is good.  Its not the party line.  Your probably right.. I like the way Ray "thinks" they are very open and hard on each other in his establishment, they believe in being honest from what I understand,  so they have to be quite aware of what is happening.  He should start backing the dump trucks up to their banks now.  That would not go over well would it.  See how that works? He said something like if you dont own gold you dont know history, I have respect for him for saying that.

Thu, 02/18/2016 - 12:29 | 7202360 warpigs
warpigs's picture

Did Bass get hammered on the Japan play? I never heard. I wonder how all of those massive shorts will play out. He has a fun job!

Thu, 02/18/2016 - 15:48 | 7203559 remain calm
remain calm's picture

It was 1% of his portfolio. He no longer hols the position.

Thu, 02/18/2016 - 12:03 | 7202199 junction
junction's picture

Well, guru Dalio, what happens when your losses continue?  Do you throw in the towel, retire and get a job as guest commentator on CNBC?  No, you will plunge ahead.  It is fun watching masters of the universe get demolished by a sinking economy. 

Thu, 02/18/2016 - 12:22 | 7202306 Wow72
Wow72's picture

Thats the rush on banning cash... They want to before he decides to go all cash. 

Thu, 02/18/2016 - 12:54 | 7202516 Debtpool
Debtpool's picture

"...high and consistent returns"???  LOL

Thu, 02/18/2016 - 11:34 | 7202046 Lady Jessica
Lady Jessica's picture

Time for Ray to get an impulse perm.

Thu, 02/18/2016 - 11:35 | 7202047 y3maxx
y3maxx's picture

USA blowed itself up ... real good.

Thu, 02/18/2016 - 11:38 | 7202071 E.F. Mutton
E.F. Mutton's picture

Big Jim McBob for Secretary of Defense.  No one would mess with us.

Thu, 02/18/2016 - 11:35 | 7202049 Early Retirement
Early Retirement's picture

Well, one thing for sure, if this is true you won't read about it on Bloomberg.

Thu, 02/18/2016 - 11:35 | 7202052 Boris Badenov
Boris Badenov's picture

Remember that stern-faced photo of Dalio at Davos?   Now we know what was happening....

Thu, 02/18/2016 - 11:36 | 7202055 Squid Viscous
Squid Viscous's picture

what a freak - and anyone that works there for more than six months turns into a freak, i have witnessed it several times

Thu, 02/18/2016 - 11:48 | 7202124 Urban Redneck
Urban Redneck's picture

Bridgewater is a cult, first and foremost, that happens to operate a few hedge(d?) funds.

Thu, 02/18/2016 - 12:50 | 7202492 onewayticket2
onewayticket2's picture

Have heard of some bizarre dynamics from someone (formerly) on the inside.  But know another still there and totally normal.

Thu, 02/18/2016 - 11:39 | 7202068 mayhem_korner
mayhem_korner's picture

 

 

If you photo-shopped the Starship Enterprise onto that little LSD pie chart, we'd be right back to Star Trek: The Motion Picture.

And try to explaining to the Millenals that Captain James T. Kirk is the bloated PriceLine Negotiator.

Thu, 02/18/2016 - 11:41 | 7202085 mayhem_korner
mayhem_korner's picture

 

 

Maybe he crossed streams with Gartman.

(Eww..I know)

Thu, 02/18/2016 - 11:42 | 7202091 buzzsaw99
buzzsaw99's picture

no biggie, he got his

Thu, 02/18/2016 - 13:51 | 7202849 herkomilchen
herkomilchen's picture

No kidding.  Under 2&20 with $81B AUM he got paid $62M over the last two weeks in return for losing that $8B.

Thu, 02/18/2016 - 11:47 | 7202108 NEOSERF
NEOSERF's picture

At the end of the day, what changed with Lehman is that if "hedging" was based on some fundamental 30-60-90,6mo strategy based on company fundamentals that balanced a portfolio...that doesn't work anymore.  "Hedging" can only be front running Central Bank jawboning, OPEC jawboning and War.  Thus if you don't have a millisecond delay advantage on twitter feeds coming from the 150 top world influencers in finance, oil or Stratfor...you are doomed to fail.  Your time horizon is also about 11 seconds....30 days is so 1999....

Thu, 02/18/2016 - 11:50 | 7202133 LawsofPhysics
LawsofPhysics's picture

So what?  Clearly a bad bussiness model and bad management, let the fuckers FAIL!!!!

Thu, 02/18/2016 - 12:02 | 7202180 Grandad Grumps
Grandad Grumps's picture

If Satan and his priests want to do a service to the world, they can wipe out all hedge funds. Satan has never been known for his eternal loyalty to his followers. How can one be, when one lives for chaos?

Thu, 02/18/2016 - 12:09 | 7202245 I am a Man I am...
I am a Man I am Forty's picture

If he owned a decent position in physical gold he would probably be flat, over the past month.

Thu, 02/18/2016 - 12:15 | 7202275 Solio
Solio's picture

Just no a bud light, Ok?

 

Or, you could light that bud! That'd be ok!

Thu, 02/18/2016 - 12:33 | 7202400 DipshitMiddleCl...
DipshitMiddleClassWhiteKid's picture

lol

i wish WW3 would start already

 

this dooms day shit is getting old!!

 

 

Thu, 02/18/2016 - 12:36 | 7202421 Mountainview
Mountainview's picture

The world largest hedge fund isn't Bridewater but the SNB (Swiss National Bank) with $ 560 bn in foreign currency holdings wherof $ 100 bn in mainly US equities. The biggest holding are over 10 million Apple shares.
They haven't explained to the public about the compliance of this holdings with their mandate to Swiss citizens.

Thu, 02/18/2016 - 15:02 | 7203316 Clowns on Acid
Clowns on Acid's picture

Please.... the US Fed holding $5 trillion in securities has to be the largest. Remember the Fed is a private organization.

Thu, 02/18/2016 - 15:31 | 7203469 Mountainview
Mountainview's picture

At least the FED hold no Chinese, Japanese or whatever foreign stocks and their Treasury bonds they can simply burn (if they feel the need, and they will)...

Thu, 02/18/2016 - 15:38 | 7203507 Big Stapler
Big Stapler's picture

A very diversified portfolio of assets in a growing economy will grow alongside that economy. If the underlying economy isn't growing, the "magic" of diversification offers no protection.

A fund that is super levered to US Treasuries will do really well if (and only if) the Federal Reserve rigs the Treasury market to subsidize insolvent banks. When the Federal reserve stops cornering the Treasury market, an over-levered Treasury bond fund no longer out performs.

Past attempts to attach some intellectual nonsense to Bridgewater's "outperformance" just makes the Dalio cult seem all the more ridiculous now.

A stagnant economy caused by failed keynesian policies, a Federal reserve that has been outed for rigging the Treasury market (debt issued by a chronic deficit spending entity that is now 450% debt/GDP -- junk bonds by any measure).

All cults eventually blow up when the cult leader is forced to reconcile his bullsh!t with reality. This time is not different.

Thu, 02/18/2016 - 16:25 | 7203772 Jack Oliver
Jack Oliver's picture

Hedge Funds are simply thieving FUCKING ASSHOLES ! I know one here in Australia - George Soros kicked it off with a 100 million dollar loan - anybody who is financed by that POS has NO morals and ZERO integrity ! They ALWAYS make themselves insidiously wealthy at the 'INVESTORS' expense !

Thu, 02/18/2016 - 19:54 | 7204781 Sir Edge
Sir Edge's picture

Dear Ray Dalio...

We haven't talked in awhile Ray but I wanted to rePost my love letter to you that i posted back in Sept of 2015... 

Here Tis...

*******************************************************************************************************

Ray Dalio... Head of The World's Largest Hedge Fund...(posted Sept of 2015)

Bets (BEGS !) that the Fed will launch QE4 instead of tightening rates / hiking rates sometime in the next quarter.  
 
Ray Dailo (Usual Hedge Fund Newsletter Speak...) 
"While we don't know if we have just passed the key turning point, we think that it should now be apparent that the risks of deflationary contractions are increasing relative to the risks of inflationary expansion because of these secular forces. These long-term debt cycle forces are clearly having big effects on China, oil producers, and emerging countries which are overly indebted in dollars and holding a huge amount of dollar assets—at the same time as the world is holding large leveraged long positions.  
 
While, in our opinion, the Fed has over-emphasized the importance of the "cyclical" (i.e., the short-term debt/business cycle) and underweighted the importance of the "secular" (i.e., the long-term debt/supercycle), they will react to what happens. Our risk is that The FED could be so committed to their highly advertised tightening path that it will be difficult for them to change to a significantly easier path if that should be required."

 
Ok... so I put his text thru the Google Translator using Elite Hedge Fund Speak... and this came out... ! 
 
Ray Dalio Translated…
"Mother of Gawd... Jeebus... If Janet 'Freaking' Yellen raises rates instead of launching QE4... then... Bridgewater is fraking toast... I mean we are goners... I mean FUBAR and melt down and I will be walking the god damn streets… and day trading the Nadex."

"All our over leveraged positions I put on during this formerly 'Beautiful Deleveraging' are gonna eat us fraking alive and spit out our bones... and that is being optimistic... Somebody get Yellen on the phone for me... "

******************************************************************

and a summary...

To think that the last 8 years since Tarp Bailout in 2008 has been  "A Beautiful Deleveraging (Ray Dalio's words)"... which is summarized by Ray as..

A beautiful deleveraging as one "in which enough 'printing' occurred to balance the deflationary forces of debt reduction and austerity in a manner in which there is positive growth, a falling debt/income ratio and nominal GDP growth above nominal interest rates."

except...

1) We have not had positive growth since 2008... just statistical lies.
2) We do not having falling debt to income ratio.
3) We do not have/had nominal GDP growth if mark to market is honestly applied
4) We do not have any austerity except on the little guy

etc... and...

Trillions of derivative positions are now over the heads of everyday bank depositors as risk backstops...

Constant rise in the price of major consumer items (food, rent, etc)...

USA War Crimes Increasing Every Year...

Unnecessary millions out of work...

Fed balance sheet to the moon...

Bubbles everywhere...

etc... etc... etc..

Edgey...

Thu, 02/18/2016 - 19:53 | 7204787 sidiji
sidiji's picture

how much leverage are these liquidating funds holding?  what are they holding? banks?

the financials got sold off today from open to close, no reason,

Thu, 02/18/2016 - 20:27 | 7205006 ZombieHuntclub
ZombieHuntclub's picture

Where's my helicopter bitchez?.

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