Ray Dalio's Bridgewater Associates had a bad 2019. The largest hedge fund in the world saw its most prominent fund lose money for the first time in years. Pure Alpha Fund II posted a 0.5% loss for last year. Its first loss since 2000. While that's better than the 4.9% decline in the six months to June, that's still got to sting.
Overall, the firm's Pure Alpha strategy was flat last year. Pure Alpha 18 Percent also lost 0.5%, while Pure Alpha 12 percent gained 0.5%.
This is a bitter reversal of 2018 when Dalio's Pure Alpha thrashed the competition with 15% gains. Since its start 28 years ago, the Pure Alpha strategy has seen average annual returns of 11.5% with a waiting list to get on it.
With the stock market at all-time highs, the fund should be crushing it. So why isn't Ray Dalio capturing these gains?
Ray Dalio's Pure Alpha fund - 2019 return
What went wrong with the Pure Alpha fund?
Pure Alpha, unlike Bridgewater’s low risk All Weather investment strategy, makes bets based on the direction of global economic trends.
It seems Dalio’s bearish outlook on global markets punished the Pure Alpha Fund in 2019. Sure, Dalio's thinking that the fundamentals might point to economic weakness in the long-term is likely spot on. But right now, in the short-term, the stock market is surging. Last year where Pure Alpha flagged, the S&P 500 gained a huge 29%.
A prime example of this is Dalio’s shorting of the bond markets last year. Lower yields sent bond prices soaring in the second half of 2019. A misstep that saw Pure Alpha having to pare back losses in the second half of the year.
One unnamed hedge fund manager told the New York Post that Dalio has taken his eye off the ball to promote his 2017 book, “Principles”.
“He apparently wasn’t paying attention to the bond market in Q3, but I bet he knew how many copies of his book were sold in August.”
“He apparently wasn’t paying attention to the bond market in Q3, but I bet he knew how many copies of his book were sold in August.” - An unnamed hedge fund manager in the New York Post
In comparison, other macro funds had a good year, with The Bloomberg Macro Hedge Fund Index rising 6.4%. One standout was Bradley Wickens’s Broad Reach Fund, which returned 42.3% for 2019.
What to expect in 2020?
2020 will be a big year for Bridgewater. Current co-CEO Eileen Murray is stepping down, leaving co-CEO David McCormick to take the reins. One challenge will be getting the flagship Pure Alpha fund back on track.
But it's not all bad news at Bridgewater. The All Weather fund returned 16%, and the All Weather China fund returned 20.1%. Although hedge fund research firm HFR points out that similar funds were up an average of 30% in 2019.
In November, Dalio blamed several economic factors including low interest rates, saying:
“This set of circumstances is unsustainable and certainly can no longer be pushed as it has been pushed since 2008. That is why I believe that the world is approaching a big paradigm shift.”
“This set of circumstances is unsustainable ... That is why I believe that the world is approaching a big paradigm shift.” - Ray Dalio
But with the Fed cutting rates, there’s unlikely to be any let up there. And holding out for that 'paradigm shift' isn't doing Pure Alpha any favours in the meantime.