Ray Dalio, the founder of Bridgewater, the world’s largest fund, has demonstrated why some people call him “the king of the bear market”.
The 72-year-old New Yorker founded Bridgewater Associates in 1975, initially advising institutional investors and advising McDonald’s, Nabisco and others on economics. The company turned to treasury management in the late 1980s and remains today.
Bridgewater currently manages about $150 billion in assets and is the world’s largest hedge fund. The company’s flagship fund, Pure Alpha II, delivered a 32% return on investment in the first half of 2022, according to people familiar with the matter.
This achievement is even more difficult given the ongoing bear market and the struggles of most funds. Equity-focused hedge funds are down nearly 5% on average so far this year, according to Hedge Fund Research.
While Dalio is no longer CEO of Bridgewater, he is still Chief Investment Officer and Chairman of the Board, with Nir Bar Dea and Mark Bertolini currently serving as co-CEOs.
So how did Dalio and Bridgewater so dramatically outpace their rivals in 2022? It all comes down to something already well known: the big short.
aggressively short Europe
Much of Bridgewater’s impressive first half of the year has been driven by shorting European companies in a very transparent move.
In June, Dalio and his company revealed that they had increased their bets on European stocks to $10.5 billion. The firm currently holds short positions in 28 European companies.
So far, the strategy has been very profitable. All of the shorted companies are members of the Euro Stoxx 50 index, which is down about 21% so far this year
For example, so far this year, shares of Adidas and BASF are down about 38%, and SAP SE is down 35%, all of which are Bridgewater’s key shorting stocks.
Dalio started betting against European stocks amid reports that economic growth in the euro zone was slowing due to rising inflation. In addition to this, Europe’s reliance on Russian gas led to an energy crisis on the continent as the war in Ukraine continued. The German government has warned that German gas rationing may be required if Russia cuts off gas supplies entirely.
Dalio took advantage of the turmoil in European markets to turn a solid profit in a matter of months, but analysts weren’t actually shocked.
Patrick Ghali, co-founder of London-based fund advisory firm Sussex Partners, told MarketWatch this week that he wasn’t surprised that this could be the beginning of a correction, not the end, given deteriorating fundamentals and high inflation (in Europe).
Long-term performance is still stable
However, even before the strong first half of the year, Dalio’s Pure Alpha II fund was one of Wall Street’s best-performing hedge funds.
Its performance has not been without its ups and downs. In 2020 alone, the Pure Alpha II fund has fallen 12.6%. Last year, the company returned just 8% while the S&P 500 rose nearly 27%.
But its nimble shorting strategy has helped them cover some big losses this year.