Back in February, when the market was hitting its 2016 lows, we reported that not all was well in the "risk parity" world of the world's largest hedge fund Bridgewater.
As we reported then, citing sources, the fund had 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 meant 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.
As we further noted, while we don't know if this was directly related, the sudden hit to Bridgewater performance may be linked to the unexpected blow up across the market neutral hedge fund space that had taken place in early February, which as we showed at the time had 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.
A quick refresh of the recent performance of Market-Neutrals shows that despite the broader market trading just shy of all time highs, M/Ns have had a very tough time in recent months, and while not as sharp as the early February plunge, the index has been sliding progressively lower.
And while this may well be unrelated, Bridgewater is having another ugly month: in fact it may be one of the worst months in the hedge fund's history. According to sources, in June Bridgewater's Pure Alpha suffered a -6.1% net drop in the month through to June 17th, a drop which is largely unprecedented for the fund. As a result, Pure Alpha's YTD, which through the end of May was -9.1%, has since deteriorated even further and is now -14.6 YTD.
It is unclear what drove the fund's performance so negative, however Pure Alpha lists the following key factors as affecting performance, both positive and negative: Looking at their winners and losers through May: Aussie bonds, GBP bonds, Mexico Peso, EM equities, and African Rand.
It us unclear precisely what dislocation caused the sharp drop in June, although it most likely was impacted by the record drop in bond yields which however has little impact on US equities.
It remains to be seen if following a purported Remain vote in the Brexit vote if Bridgewater will recoup some or all of its June losses.