How Does the World’s Largest Hedge Fund Really Make Its Money?

[Munger_Disciple]

39 minutes ago, Spekulatius said:

His book "Principles" which I tried to read as a pdf is terrible imo and I don't recommending wasting time it.

 

+1

 

Every time I listen to Dalio on TV, I get a headache. So I stopped watching his interviews. 

[TwoCitiesCapital]

2 hours ago, ValueArb said:

 

I don't know how much Ray outperformed if Pure Alpha only averaged 1.5% a year from 2012 to end of 2022.

 

 

Pretty sure the period in question was either before this, or a lot longer of a time frame. Eastman Kodak was one of their first large clients. Can't recall if it was the 80s or 90s in which they were landed. 

 

Not sure if the returns you quote either. They've definitely been lowe than the S&P. But 1.5% per annum sounds a bit on the lower end from what I know returns were when I was through 2014 And what they were last year. Would've had to really shit the bed in 2016-2021 to have brought that down to 1.5%, but maybe they did

 

2 hours ago, ValueArb said:

I feel Portable Alpha is well accepted as a marketing tool for investment managers and derivative sales people, but I don't accept it as an actual good investment strategy. It got crushed for years after the GFC for example. I find any theories based on CAPM to lack rigor or application in the real world, where risk is not volatility.

 

PSLDX has done great for 15 years (even after giving back a lot during the last 3 years). So there is one clear winner at the Portable Alpha game.

 

I mean, the last 15-years contain the period following the GFC and the biggest bear market for long duration fixed income in history. And even after underperforming by 15% per annum for the last 3-years running has managed to maintain a 2-3% alpha to the index over that time....seems pretty durable to me unless it you expect that we'll repeat the losses seen in fixed income over the last 3-years again. Which would require rates north of 10% at the long end to achieve. 

 

2 hours ago, ValueArb said:

But history rhymes not repeats. If its still crushing 5 years from now it will then have the problem of will it be able to handle all those inflows since no one will ever want to own just a raw index anymore?

 

I mean, it crushed it for 15-years. Only stopped when interest rates returned from zero to their highest point of that 15-year period and maintained sizable outperformance to the index.

 

Also, 15-years is the length of the mutual fund. The separate accounts that did this for pensions started in the 80s. 40-50 plus years of this strategy working and and not even zero rates, and then the return to normalization, or mutual fund fees could kill it. And now we're back to long-end rates being the highest they've been over that periods resetting the advantage. I'm gonna guess it'll outperforming sizable going forward and build on that 2-3% alpha. 

 

Perhaps you don't like equating volatility and risk, but when leveraged or exposed to inflows/outflows it does matter. And for ~50 years the strategy has been working if you're systematically applying it.

 

Just another way to skin a cat if you ask me and Ray was one of the people to popularize it's use. 

Edited November 16, 2023 by TwoCitiesCapital

[sleepydragon]

46 minutes ago, Munger_Disciple said:

 

+1

 

Every time I listen to Dalio on TV, I get a headache. So I stopped watching his interviews. 

Every single employees at BW have to remember every sentence in it. They have study sessions and exams on this book

[Munger_Disciple]

1 hour ago, sleepydragon said:

Every single employees at BW have to remember every sentence in it. They have study sessions and exams on this book

 

That would be torture . It is amazing what people would do for money. Apparently BW pays even secretaries $200K per year (according to Copeland) to put up with this stuff. 

[sleepydragon]

1 hour ago, Munger_Disciple said:

 

That would be torture . It is amazing what people would do for money. Apparently BW pays even secretaries $200K per year (according to Copeland) to put up with this stuff. 

not only that. I heard Ray Dalio also printed a Chinese version of his “principle” book, with red covering like Mao’s book, and gave them to many Chinese officials . Lol

[mattee2264]

It does make you appreciate even more how investors like Warren and Charlie can share so much wisdom about how to invest but also how to live. 

 

 

[Gregmal]

Ray peddling more BS on CNBC this morning….

[Munger_Disciple]

1 hour ago, Gregmal said:

Ray peddling more BS on CNBC this morning….

 

Yeah, he apparently shared some amazing insights such as this: "Economically strong means financially strong" 

 

https://www.cnbc.com/2023/11/17/ray-dalio-says-us-reaching-a-point-where-our-debt-problem-gets-even-worse.html

 

[ValueArb]

19 hours ago, TwoCitiesCapital said:

I mean, it crushed it for 15-years. Only stopped when interest rates returned from zero to their highest point of that 15-year period and maintained sizable outperformance to the index.

 

Also, 15-years is the length of the mutual fund. The separate accounts that did this for pensions started in the 80s. 40-50 plus years of this strategy working and and not even zero rates, and then the return to normalization, or mutual fund fees could kill it. And now we're back to long-end rates being the highest they've been over that periods resetting the advantage. I'm gonna guess it'll outperforming sizable going forward and build on that 2-3% alpha. 

 

Perhaps you don't like equating volatility and risk, but when leveraged or exposed to inflows/outflows it does matter. And for ~50 years the strategy has been working if you're systematically applying it.

 

Just another way to skin a cat if you ask me and Ray was one of the people to popularize it's use. 

 

Thanks for bringing this to my attention, portable alpha is an interesting topic I admit I didn't know as much about as I thought. I didn't even know about PSLDX. You've made it an area of research for me. One thing I will say is that I'm always skeptical of free lunches, I assume there is always some sort of cost but don't know what it is here. I remember when Long Term Capital Management was using advanced mathematics to print money and crush the markets with back to back 40%+ years. 

 

One criticism of PSLDX is that it's leveraged and in losing markets has always done worse than the index, sometimes way worse. It lost 43% in 2022 vs. index 17.5%,  it lost 10% in 2018 vs index 7%, lost 3% in 2015 when index lost 0.3%. But of course we should care more about long term overall performance than volatility, and it's clearly delivering higher performance despite its higher volatility. It appears to be part of the portable alpha results that the highs are higher but lows are lower, if we use as another example when the pension funds using it had a few terrible years after the GFC.

 

Questions that gives me, is the strategy increasing performance by adding volatility (and if so, how can I do same)? Does its leverage create risk of black swan events? IE during a rapid market crash could a combination of large outflows and difficulty in quickly exiting existing leverage obligations ever force PSLDX to close to prevent a "run on the bank" that would make it insolvent? I assume that the math geeks on staff at Pimco have modeled this ad infinitum and manage the futures/leverage to ensure its impossible, but again "there is no free lunch" keeps popping in my head. 

 

I vow to either find a crippling flaw in portable alpha, or buy a lot of index futures in my portfolios;)

[thepupil]

you seem to be interchanging "portable alpha" and "risk parity"

 

my admittedly limited understanding is they are not the same. 

 

I think of "portable alpha" as the separation of alphas and betas. So for s simplified example, let's say I found an investor that i "know" can beat the Japanese stock index by 500 bps in yen terms, but I want neither the yen exposure nor the Japanese stock market beta. Instead I want US stocks. A "portable alpha" strategy would invest in the investment manager short the japanese index and go long US stocks. So you'd earn the beta of the US stock market and the alpha of the japanese manager, and achieve your goal of your desired beta plus alpha. 

 

"risk parity" is basically sizing of exposures based upon their "risk". so If bonds have 1/4 of the "risk" than stocks, but I want to have equal risk in both bonds and stocks, all else equal I own 4x as many bonds as stocks. PSLDX seems to be a fund which is managed in such a fashion w/ stocks and levered bonds. 

 

Pure Alpha, managed by Bridgewater, in my limited understanding is a macro fund that tries to generate "alpha" by taking views on various asset classes returns and generally not have too much beta (long Japanm equities, hedged of the yem, short US equities agains EM equities, short long term USD rates, long oil / short USD etc) 

 

All Weather, managed by Bridgewater, in my limited understanding, is a risk parity fund which tries to invest in diversified betas such that the fund makes money in all environments (2022 not so much). 

 

@TwoCitiesCapital would you agree / disagree with this?

 

[ValueArb]

4 hours ago, thepupil said:

you seem to be interchanging "portable alpha" and "risk parity"

 

my admittedly limited understanding is they are not the same. 

 

I think of "portable alpha" as the separation of alphas and betas. So for s simplified example, let's say I found an investor that i "know" can beat the Japanese stock index by 500 bps in yen terms, but I want neither the yen exposure nor the Japanese stock market beta. Instead I want US stocks. A "portable alpha" strategy would invest in the investment manager short the japanese index and go long US stocks. So you'd earn the beta of the US stock market and the alpha of the japanese manager, and achieve your goal of your desired beta plus alpha. 

 

"risk parity" is basically sizing of exposures based upon their "risk". so If bonds have 1/4 of the "risk" than stocks, but I want to have equal risk in both bonds and stocks, all else equal I own 4x as many bonds as stocks. PSLDX seems to be a fund which is managed in such a fashion w/ stocks and levered bonds. 

 

Pure Alpha, managed by Bridgewater, in my limited understanding is a macro fund that tries to generate "alpha" by taking views on various asset classes returns and generally not have too much beta (long Japanm equities, hedged of the yem, short US equities agains EM equities, short long term USD rates, long oil / short USD etc) 

 

All Weather, managed by Bridgewater, in my limited understanding, is a risk parity fund which tries to invest in diversified betas such that the fund makes money in all environments (2022 not so much). 

 

@TwoCitiesCapital would you agree / disagree with this?

 

 

This board needs an upvote feature.

[TwoCitiesCapital]

5 hours ago, thepupil said:

you seem to be interchanging "portable alpha" and "risk parity"

 

my admittedly limited understanding is they are not the same. 

 

I think of "portable alpha" as the separation of alphas and betas. So for s simplified example, let's say I found an investor that i "know" can beat the Japanese stock index by 500 bps in yen terms, but I want neither the yen exposure nor the Japanese stock market beta. Instead I want US stocks. A "portable alpha" strategy would invest in the investment manager short the japanese index and go long US stocks. So you'd earn the beta of the US stock market and the alpha of the japanese manager, and achieve your goal of your desired beta plus alpha. 

 

"risk parity" is basically sizing of exposures based upon their "risk". so If bonds have 1/4 of the "risk" than stocks, but I want to have equal risk in both bonds and stocks, all else equal I own 4x as many bonds as stocks. PSLDX seems to be a fund which is managed in such a fashion w/ stocks and levered bonds. 

 

Pure Alpha, managed by Bridgewater, in my limited understanding is a macro fund that tries to generate "alpha" by taking views on various asset classes returns and generally not have too much beta (long Japanm equities, hedged of the yem, short US equities agains EM equities, short long term USD rates, long oil / short USD etc) 

 

All Weather, managed by Bridgewater, in my limited understanding, is a risk parity fund which tries to invest in diversified betas such that the fund makes money in all environments (2022 not so much). 

 

@TwoCitiesCapital would you agree / disagree with this?

 

 

Yes, I agree with your definitions and the strategies at the high level. My initial comment was in response to the criticism of Ray suggesting you could separate alphas and betas - at which point I brought up "portable alpha" as an example of that being done exactly - taking equity beta and doing a fixed income overlay for alpha a la PSLDX. 

 

You could frame portable alpha multiple ways, and probably come up with a number of examples inside of the Pure Alpha Fund - but as a simple example -

 

Imagine you have taken a simple version of their All Weather approach -

 

25% of your portfolio in gold/TIPS for high inflation/low growth,

25% in energy and commodities for high inflation/high growth,

25% in long bonds for low growth/deflation,

and 25% in equities for high growth/low inflation

 

We can debate the weights, and the eventual addition of leverage and other asset classes, but this is All Weather at its simplest. 

 

Instead of doing all of that with outright equities, commodities, and bonds - you can do it all with derivatives. 

 

25% in Gold Futures

25% in oil/base metal futures

25% in S&P 500 TRS

And 25% long treasury futures

 

Now you're cash outlay isn't 100%. It's 10-20% for the initial margin. You can set aside another 10-20% in short duration/liquid treasuries to cover daily margin movement and collateral. And you can take the other 60-70% of the cash and drop it the Pure Alpha Fund where they're making uncorrelated, relative value bets that perform differently than your 4 betas. 

 

That's portable alpha - straight beta exposure in All Weather and the excess cash buys an alpha overlay 

Edited November 17, 2023 by TwoCitiesCapital

[ValueArb]

@TwoCitiesCapital @thepupil Thanks to both of you for this interesting discussion.

[TwoCitiesCapital]

About 2/3 of the way through the book. 

 

For the most part, I can't really speak to the details. What is described is NOT my experience at the firm, but I also wasn't on close to any of the people it's discussing to know how it might've changed given proximity to them. 

 

I can see some of the stuff happening, some of the stuff being exaggerated, and some of the stuff being fabrication/fiction from upset ex-employees. Hard to know which is which though. 

 

That being said, some of the research seems laughable. The author talks about Bridgewater managing $130B but not moving markets, nobody observing its trading, and many suspecting it was a Ponzi. 

 

This seems to simply show a total lack of understanding of instruments like swaps/futures/derivatives that give you massive notional exposure for minimal cash outlay and don't have to be reported to agencies - especially in the period prior to central clearing for swaps where everything was bespoke. 

 

Bridgewater didn't move markets because they didn't go out and buy $2B of SPY. They'd go to Barclays, Goldman, Deutsche, etc and perhaps open bespoke total return swaps of $100-500 million apiece. Those banks act as prime broker to many other hedge funds/traders - many of whom are on the other side of the trade - leaving minimal amounts to actually have to hedge in shares for the bank. Suddenly, Bridgewater has $2 billion of exposure for only $200 million in cash and even fewer shares traded on the market to offset.

 

Similar things can be said for interest rate swaps. And then there's futures markets. And options. And credit default swaps.  With the leveraged positioning, Bridgewater doesn't need to invest the $150B - rather just $15-20 billion in leveraged/derivative instruments with the rest remaining in liquid cash, t-bills, and treasuries to manage collateral. By investing in dozens of liquid markets like treasuries and currencies and futures and commodities, those trades don't get reported, have plenty of counterparties trading in size, and reduce the impact of $15-20B when spread across 20-50 markets. It's really not a difficult concept and seems wholly ignored by the writer suggesting nobody on the street knows how Bridgewater trades $130B secretly without moving markets. 

 

It also suggests Bridgewater doesn't actively obfuscate the trading to avoid competitors being able to back into their trading patterns - something I'm pretty sure many algorithmic and quant funds do. 

 

Something this basic seemingly being misrepresented makes me wonder how much more stuff is being misrepresented

Edited December 21, 2023 by TwoCitiesCapital

[brobro777]

39 minutes ago, TwoCitiesCapital said:

About 2/3 of the way through the book. 

 

For the most part, I can't really speak to the details. What is described is NOT my experience at the firm, but I also wasn't on close to any of the people it's discussing to know how it might've changed given proximity to them. 

 

I can see some of the stuff happening, some of the stuff being exaggerated, and some of the stuff being fabrication/fiction from upset ex-employees. Hard to know which is which though. 

 

That being said, some of the research seems laughable. The author talks about Bridgewater managing $130B but not moving markets, nobody observing its trading, and many suspecting it was a Ponzi. 

 

This seems to simply show a total lack of understanding of instruments like swaps/futures/derivatives that give you massive notional exposure for minimal cash outlay and don't have to be reported to agencies - especially in the period prior to central clearing for swaps where everything was bespoke. 

 

Bridgewater didn't move markets because they didn't go out and buy $2B of SPY. They'd go to Barclays, Goldman, Deutsche, etc and perhaps open bespoke total return swaps of $100-500 million apiece. Those banks act as prime broker to many other hedge funds/traders - many of whom are on the other side of the trade - leaving minimal amounts to actually have to hedge in shares for the bank. Suddenly, Bridgewater has $2 billion of exposure for only $200 million in cash and even fewer shares traded on the market to offset.

 

Similar things can be said for interest rate swaps. And then there's futures markets. And options. And credit default swaps.  With the leveraged positioning, Bridgewater doesn't need to invest the $150B - rather just $15-20 billion in leveraged/derivative instruments with the rest remaining in liquid cash, t-bills, and treasuries to manage collateral. By investing in dozens of liquid markets like treasuries and currencies and futures and commodities, those trades don't get reported, have plenty of counterparties trading in size, and reduce the impact of $15-20B when spread across 20-50 markets. It's really not a difficult concept and seems wholly ignored by the writer suggesting nobody on the street knows how Bridgewater trades $130B secretly without moving markets. 

 

It also suggests Bridgewater doesn't actively obfuscate the trading to avoid competitors being able to back into their trading patterns - something I'm pretty sure many algorithmic and quant funds do. 

 

Something this basic seemingly being misrepresented makes me wonder how much more stuff is being misrepresented

 

I think it's understandable what the writers are doing. They have to try to sell books to dunskys like me, an average guy in LA working some job and they need something sensational to take my attention away from Beavis and Butthead. What better than huge sums of money and secretive conspiracy sounding stuff sprinkled with weirdo personalities? And if things get misrepresented here and there, well that's how the sausage gets made

 

I'm not reading hundreds of pages though, no way bro, that's for nerds