Ray Dalio, founder of the hedge fund leader, anticipated the cycle change well.
While the stock markets fell in 2018, the “Pure Alpha” strategy of Bridgewater, the largest hedge fund manager, posted a performance of 14.6% in 2018. Billionaire Ray Dalio’s hedge fund saw the monetary shift very well central banks.
Ray Dalio founded his hedge fund, Bridgewater Associates, in his New York two-room apartment in 1975. He is now one of the richest men in the world, with an estimated fortune of $ 18.1 billion per year. Forbes magazine. Bridgewater Associates now manages $ 160 billion in assets with 1,700 employees, making it the leader in alternative investments. This American group, based in Westport, Connecticut, performed significantly better than the branch. The group’s “Pure Alpha” strategy has indeed gained 14.6%, according to the Bloomberg agency, which says it has the documents to show this.
If hedge funds are known for their short-term behavior, the net annual return of the “Pure Alpha Strategy” would be 12% since 1991. The latter strategy belongs to the “global macro” category, a branch of hedge funds that does not is not limited to a category of securities, such as equities, but which tries to take advantage of all possible opportunities in all markets.
Ray Dalio, legendary founder of the world's largest hedge fund, thinks China will again become the world's most powerful empire in the coming years.
— CryptoOutsourcing (@Cryptoutsorcing) January 6, 2019
Difficult year for hedge funds
Ray Dalio’s holdings arguably increased further last year, although the hedge fund industry suffered. Hedge funds, a $ 3 trillion market, posted a negative 6.7% performance last year according to the HFRX Index. And several stars in this industry have closed some of their funds. For example, Geneva manager Philippe Jabre closed three funds that he personally supervised.
The performance of “Pure Alpha” in 2018 follows a 2017 financial year that did not go well as the return did not exceed 1.2%, according to the Financial Times.
In an interview with The City’s Salmon Daily, Bob Prince, the hedge fund’s chief investment officer, revealed his cautious stance in the markets last fall. In the opinion of this strategist, the monetary policy of central banks is “at an inflection point”. In the interview, he noted the existence of “a lot of optimism in the earnings outlook of the companies.” He warned that the expansion of the economy was shifting from “strong to poor”.
Trend change according to Ray Dalio
In a “post” on LinkedIn at the end of December 2018, Ray Dalio estimated that markets would remain “rocky” (volatile) for the next few months, even if earnings and the economy remained “healthy”. He added: “We are in a classic end-of-cycle situation, characterized by a significant rise in profits and strong economic growth, accompanied by a drop in stock prices.” Before concluding: “This is exactly when things happen that most people think they can never happen.”
Ray Dalio doesn’t just manage funds for investment professionals. The billionaire, the son of a saxophonist, knows the music of the markets and tries to pass it on to savers. Last year, he published A Template For Understanding Big Debt Crises. It also offers some rules for the general public to follow. Its formula is three simple steps: decide how much you need to save to be safe in the event of a problem; create a diversified portfolio in stocks, bonds and commodities; and finally learn from long-term stock market cycles.
Admittedly, Bridgewater did not have the best performance of the year. Bloomberg cites, for example, SoMa Equity Partners, with a yield of 20% in 2018. It is a fund that takes positions both long and short in equities (long / short equity), with $ 1.2 billion in assets. Its managers invested in small technology stocks, especially in software before turning to more defensive groups before the decline in the second half.
Asked by CNBC, he recalled that in this troubled stock market period, the first thing to understand is that “cycles repeat themselves.”
“People need to understand that speculative bubbles appear and are followed by corrections (…). Ignoring these historic cycles is a common mistake many investors make, “he said.
Clearly, their mistake is to judge a stock market to be positive because it is rising rather than to think that it is probably expensive.”
Likewise, when the market is down, he says: “these same investors think this is a bad market, instead of thinking this is probably an opportunity to buy good value at a good price. ”
“The importance of cycles, the long-term focus and the need to diversify holdings are more relevant than ever.
Ray Dalio recalls that after World War II, from the summer of 1949 to the summer of 1956, the S&P 500 index posted a return of 267%. The same cycle repeated after the 2008 crisis. In ten years, the S&P 500 has climbed more than 200%.”
In November 2018, the lesson was worth remembering. The importance of cycles, the long-term focus and the need to diversify holdings are more relevant than ever.