The world's biggest hedge-fund firm just got bigger with the launch of one of the largest new funds ever.
Bridgewater Associates is nearly finished launching a $10 billion fund, the latest sign of the hedge-fund industry's rebound from the 2008 financial crisis.
Hedge funds are mopping up billions from big investors with few other places to park their cash in an era of ultralow interest rates and volatile stock-market returns. Industry assets as of March 31 topped the peak of early 2008, showing how wealthy families, college endowments, sovereign-wealth funds and other large investors have regained their appetite for riskier strategies.
Bridgewater Associates, the world's biggest hedge fund, just got bigger with the launch of one of the largest new funds. WSJ's Michael Corkery talks with Kelsey Hubbard about the recovery in the hedge-fund market and what sets Bridgewater apart.
Hedge funds also are benefiting from pension funds' eagerness to use so-called alternative investments to juice returns and fill funding gaps.
Founded 36 years ago by Ray Dalio, a Harvard Business School graduate known for quirky philosophical musings, the Westport, Conn., Bridgewater said its assets now top $100 billion. That is a large sum for a firm that depends on nimble trades across the globe. Bridgewater specializes in macroeconomic investing, using computer-executed trades in dozens of currency, bond and stock markets.
In the following video, Mr. Dalio speaks about Bridgewater's values of truth and openess, corporate culture and level of transparency. Bridgewater's employee/partner's convey similar feelings about Bridgewater's corporate culture, and provide valuable insights into the firm's operating philosophy, decision-making, teamwork and relationships with its clients. These people have a lot of passion for their work, don't let their ego get in their way, and their level honesty and professionalism is right up there.
Bridgewater's allure stems partly from its reputation as a sober, process-driven operation that spared its investors the worst of the 2008 markets meltdown. While many hedge funds are known as gun-slinging shops, Bridgewater's flagship hedge fund, Pure Alpha, posted a positive return in 2008. That year, the average hedge fund lost 19%.
Pure Alpha investors had less to cheer in 2009, when the fund eked out a 2% return, while the stock market rallied. Last year, it posted a 45% return, its best in two decades.
Bridgewater's big size—it has 1,200 employees—is a drawing card to some investors, because the firm can provide resources that many others don't. Bridgewater analysts put out frequent research reports, and its executives make themselves available to share market insights, consultants said.
Said Bob Jacksha, chief investment officer of the New Mexico Educational Retirement Board, which invested in the new Bridgewater fund.
"Their performance has been good, and we are pleased with their customer service."
The new Bridgewater fund, Pure Alpha Major Markets, essentially extends Pure Alpha's macro strategy to large markets, such as bond markets in the United Kingdom and Germany.
The new fund, which is only available to current Bridgewater investors, started trading in November 2010 with $2.4 billion in assets and an additional $7.5 billion committed from investors. About half of the money comes from profits returned to investors from Pure Alpha; the other half is new money from existing clients. Bridgewater has stopped taking new investments for the fund, according to a person familiar with the matter.
Bridgewater has about $67 billion in the two Pure Alpha funds, and the remainder is in a "long"-only fund.
The new fund has returned about 11% so far this year, the same as the older Pure Alpha fund, while the average hedge fund returned 2%, according to Hedge Fund Research Inc.
Since the dark days of the financial crisis, the hedge-fund industry has rebounded, with assets passing $2 trillion for the first time ever, as of March 31, according to HFR. The industry grew by $102 billion in the first quarter, backed by a rise in asset values and $32 billion in new capital, the largest net inflow since the third quarter of 2007, HFR said.
Big managers like Bridgewater have gotten an extra-large helping of the money coming back into the industry, in what consultants say is "a flight to safety" by cautious investors who prefer well-established players. Samuel Hocking, global sales head for French bank BNP Paribas's prime-brokerage unit, said of Bridgewater.
"They are very transparent, and it helps. The more people can feel like they understand what you are doing, where you are going, and what the strategy is overall, the more likely [the hedge-fund firm] will be able to increase capital."
Until Bridgewater's recent launch, industry participants viewed the 2006 launch of $6 billion Convexity Capital Management, by former Harvard University endowment chief Jack Meyer, as the largest. The environment for new funds was better during the boom years of the 2000s, when former Goldman trader Dinakar Singh launched TPG-Axon with $3 billion, and Eric Mindich, another top Goldman trader, launched Eton Park Capital with $3.5 billion.
Said Greg Jensen, who shares chief executive and chief investment officer duties with Mr. Dalio, said Bridgewater, despite its size, can still quickly trade in and out of positions.
"We are the world's largest hedge fund, but we are small players in big markets."
Behind Bridgewater's bets is a bearish view of the world. Mr. Jensen said.
"The private sector isn't strong enough to make up for tightening monetary policy, and the economy is starting to slow."
Bridgewater operates out of two leafy campuses in Westport, a suburb about 50 miles north of New York City. From a trading floor, surrounded by pine trees, Bridgewater places wagers across about 100 different markets.
Mr. Jacksha visited the Bridgewater offices in 2009 and has a copy of Mr. Dalio's "Principles," which dispense advice about investing and life. Those principles include, for instance.
"Never say anything about a person you wouldn't say to him directly. If you do, you are a slimy weasel."
Bridgewater executives have twice come to Albuquerque to speak at the pension fund's annual retreat.
Mr. Jacksha said.
"Every investment manager has his own culture. Some are more unique than others."
Bridgewater Associates is an American investment company founded by Ray Dalio and is reported to be one of the world's largest hedge funds with $94 billion under management in 2011. The company has 1,100 employees and 270 clients that include pension funds, endowments, foundations, foreign government and central banks.
The company was founded by Ray Dalio in 1975 and began investment operations as a fixed income and currency adviser to institutional clients. The company later moved on to institutional hedging exposures consisting of interest rate, currency and commodity risks. Bridgewater also began selling economic advice to governments and companies such as Nabisco and McDonalds and published a paid subscription research report called the Daily Observations.
In the mid 1980's, Bridgewater changed its business focus from currency and interest rate management to global bonds and currencies for institutional investors." In 1981, Bridgewater Associates moved its offices from New York City to the Schulz Farm estate in Wilton, CT. Bridgewater outgrew the Shultz Farm estate and moved to a larger space in the late 90s. Bridgewater continued to expand and eventually became the sole lessee at its One Glending Place location.
In June 1991, Bridgewater launched its Pure Alpha Strategy and its optimal alpha strategy (optimal active management overlay / hedge fund strategy) and in 1994, began managing inflation-linked bond mandates. In 1995/1996, Bridgewater was invited to the US Treasury task force as an expert on the structure of global inflation-linked bonds and aided in the design of US TIPS.
In 1996, Bridewater's founder Ray Dalio, developed the All Weather strategy global inflation-linked bonds and global fixed income exposures. Later that year, the company began advising the French Tresor on structure and demand for French inflation-linked bond issuance.
In an industry rifled with controversy, unethical practices, insider trading, fraud and greed, one of the most refreshing things I discovered about Bridgewager is its corporate culture which preaches honesty to the nth degree.
Bridgewater's culture encourages employees to do "whatever it takes to make the company great" and utilizes "an extreme meritocracy of ideas" with the goal of eliminating the "hierarchy in the investment decision-making process." The corporate culture features “radical transparency,” a theory of management that requires complete honesty and total accountability.
A 110-page manifesto of company principles, written by its founder, about work, life and the path to greatness, is distributed to all employees. According to a 2011 article in New York Magazine, 30% of all employees quit or are terminated within two years but those that remain receive "generous" compensation and form bonds with fellow employees that are like family. Employees are transported daily in a "fancy" bus from Manhattan to the company's Westport offices. The company has strict security and monitors phone calls, emails and other employee activities. Employees are also required to sign nondisclosure agreements. Instruction in the Transcendental Meditation technique is subsidized for employees and founder Dalio, brings the techniques self-actualization precepts into the company culture.
ACCOMPLISHMENTS AND AWARD
According to research by Financial News, Bridgewater was the fastest growing asset manager between 2000 and 2005. In 2003, Global Investor described Bridgewater as a pioneer and leader currency investment strategies.
In 2011, Institutional Investor magazine ranked Bridgewater number one in its Hedge Fund 100 listing of the world's top 100 hedge funds. In 2009, Barron's Magazine recognized Bridgewater for being amongst the first to identify the sub-prime mortgage crisis and global market crash. Founder, Ray Dalio is credited with coining the term the D-Process for the deleveraging and deflationary process of the sub-prime mortgage crisis in order to describe what was happening globally and distinguish it from a recession. An AR Magazine's survey gave high ratings to Bridgewater.
A 2011 article in New York Magazine described the company as the "largest and weirdest hedge fund" because of its unusual corporate culture. An article in Absolute Return + Alpha magazine characterized the corporate culture as “brutal” and “demoralizing.”
HEDGE FUNDS 101 FOR THE NOVICE
Some of you are probably asking yourself, just what the hell is a hedge fund?
Here's what Wikipedia says about hedge funds,
"A hedge fund is a private investment fund that participates in a range of assets and a variety of investment strategies intended to protect the fund's investors from downturns in the market while maximizing returns on market upswings."
Hedge funds are distinct from mutual funds (401K), individual retirement and investment accounts, and other types of traditional investment portfolios in a number of ways. As a class, hedge funds undertake a wider range of investment and trading activities than traditional long-only investment funds, and invest in a broader range of assets, including equities, bonds and commodities. Most hedge fund investment strategies aim to secure positive return on investment regardless of overall market performance. Hedge fund managers typically invest their own money in the fund they manage, which serves to align their interests with investors in the fund
Hedge funds are where multi-millionaires, billionaires, wealthy families, pension funds, institutional investors, university endowments, foundations and sovereign governments invest their money. They are essentially a private investment "country club" for priveleged, deep pocket and sophisticated investors. Hedge funds are off limits to Main Street investor's.
Investors in hedge funds typically pay a management fee that goes toward the operational costs of the fund, and a performance fee when the fund’s net asse value is higher than that of the previous year. The net asset value of a hedge fund can be billions of dollars, due to investments from large institutional investors including pension funds, university endowments and foundations.
TOP 25 HEDGE FUNDS OF 2011
On May 2011, Institutional Investor released its “Hedge Fund 100″ rankings for 2011, and Bridgewater Associates was the biggest hedge fund in the world with $58.9 billion in hedge fund assets under management. Bridgewater Associates enjoyed a banner year in 2010, as their “Pure Alpha” fund delivered a whopping 44.8% annual return. High returns and increased inflows helped Bridgewater grow their assets by more than $24B in 2010.
Here are the Top 10 hedge funds rankings followed by hedge funds ranked 11 through 25:
- Bridgewater Associates (Westport, CT), Ray Dalio, Founder (2011: $58.9 billion, 2010: $34.6 billion - 2010 rank: #2)
- J.P. Morgan Asset Management (New York, NY), Jamie Dimon, CEO ** (2011: $54.2 billion, 2010: $45.1 billion, 2010 rank: #1)
- Man Investments (London, UK), Peter Clarke, CEO (2011: $40.6 billion, 2010: $21.7 billion, 2010 rank: #8
- Paulson & Co. (New York, NY), John Paulson, President (2011: $35.887 billion, 2010: $32.105 billion, 2010 rank: #3
- Brevan Howard Asset Management (London, UK), Alan Howard, Managing Director (2011: $32.0 billion, 2010: $27.0 billion, 2010 rank: #4)
- Soros Fund Management (New York, NY), George Soros, Founder & Chairman (2011: $27.9 billion, 2010: $27.0 billion, 2010 rank: #4)
- Och-Ziff Capital Management Group (New York, NY), Daniel S. Och, CEO (2011: $27.6 billion, 2010: $23.5 billion, 2010 rank: #7)
- BlackRock (New York, NY), Larry Fink, CEO (2011: $25.0 billion, 2010: $16.9 billion, 2010 rank: #16)
- BlueCrest Capital Management (London, UK), Michael Platt, Co-Founder (2011: $24.5 billion, 2010: $17.0 billion, 2010 rank: #15)
- Angelo, Gordon & Co. (New York, NY), John M. Angelo, CEO (2011: $23.6 billion, 2010: $20.8 billion, 2010 rank: #10
- Baupost Group ($23.4 billion)
- Farallon Capital ($21.5 billion)
- King Street Capital (($19.9 billion)
- Goldman Sachs Asset Management ($19.8 billion)
- Avenue Capital ($18.3 billion)
- Winton Capital Management ($17.78 billion)
- Renaissance Technologies ($17.0 billion)
- Elliott Management ($16.8 billion)
- AQR Capital ($16.7 billion)
- Landsdowne Partners ($16.146 billion)
- DE Shaw ($15.6 billion)
- Davidson Kempner Capital ($15.3 billion)
- Appaloosa Management ($15.0 billion)
- Moore Capital ($15.0 billion)
- ESL Investments ($14.0 billion)
Hedge funds employ a wide range of trading strategies. Establishing a formalized system of classification is difficult due to the rapidity with which strategies change and evolve. However, hedge fund strategies are generally said to fall into four main categories:
- Global Macroeconomic - Hedge funds utilizing a global macroeconomic investing strategy take sizable positions in share, bond or currency markets in anticipation of global macroeconomic events in order to generate a risk-adjusted return. Global macro fund managers use macroeconomic ("big picture") analysis based on global market events and trends to identify opportunities for investment that would profit from anticipated price movements.
- Directional - Directional investment strategies utilize market movements, trends, or inconsistencies when picking stocks across a variety of markets. Computer models can be used, or fund managers will identify and select investments.
- Event-Driven - Event-driven strategies concern situations in which the underlying investment opportunity and risk are associated with an event. An event-driven investment strategy finds investment opportunities in corporate transactional events such as consolidations, acquisitions, recapitalizations, bankruptcies, and liquidations.
- Relative Value (arbitrage) - Relative value arbitrage strategies take advantage of relative discrepancies in price between securities. The price discrepancy can occur due to mispricing of securities compared to related securities, the underlying security or the market overall.
These four categories are distinguished by investment style and each have their own risk and return characteristics. Managed futures or multi-strategy funds may not fit into these categories, but are nonetheless popular strategies with investors. It is possible for hedge funds to commit to a certain strategy or employ multiple strategies to allow flexibility, for risk management purposes, or to achieve diversified returns. The hedge fund’s prospectus, also known as an offering memorandum, offers potential investors information about key aspects of the fund, including the fund's investment strategy, investment type, and leverage limit.
The elements contributing to a hedge fund strategy include:
- Market Approach - There are a variety of hedge fund market approaches to different asset classes, including equity, fixed income, commodity and currency.
- Investment Instrument - The type of investment instruments used include:equities, fixed income, futures, optios and swaps.
- Market Sector - This the particular industry sector(s) in which the hedge fund invest (e.g. healthcare).
- Investment Strategy - Investment strategies can be divided into those in which investments can be selected by managers, known as “discretionary/qualitative”, or those in which investments are selected using a computerized system, known as “systematic/quantitative”.
- Degree of Diversification - The degree of diversification within the fund can vary; funds may be multi-strategy, multi-fund, multi-market, multi-manager or a combination.
Sometimes hedge fund strategies are described as absolute return and are classified as either market neutral or directional. Market neutral funds have less correlation to overall market performance by “neutralizing” the effect of market swings, whereas directional funds utilize trends and inconsistencies in the market and have greater exposure to the market's fluctuations.
HEDGE FUND REGULATION
Hedge funds within the U.S. are subject to various regulatory trading reporting and record keeping requirements that also apply to other investors in publicly traded securities. Before the Dodd-Frank Act made registration mandatory for hedge fund advisers with more than US$150 million in assets under management, hedge funds were primarily regulated through their managers or advisers, under the anti-fraud provisions of the Investment Advisors Act of 1940. Hedge funds are privately-owned pools of investment capital with regulatory limits on the number and type of investor that each fund may have. Because of these regulatory restrictions on ownership, hedge funds have been exempt from mandatory registration with the U.S. Securities & Exchange Commission (SEC) under the Investment Company Act of 1940, which is generally intended regulate investment funds sold to retail investors.
HEDGE FUND CONTROVERSIES
Though hedge funds are a lucrative alternative investment option, it has been subject to much debate on account of the risks associated with it. In fact, the numerous hedge fund debates and controversies have questioned the viability and reliability of hedge funds an investment mechanism. Principal hedge fund controversies include:
- Transparency - Hedge fund transparency has been the major point of debate and controversy. Usually, hedge funds are not required to disclose their activities and dealings to third parties. In many cases, the investors have direct access to the investment advisor which enables them to get information about risks. The debate is whether hedge funds should or should not maintain transparency. It is said that the hedge funds may decide to disclose some amount of information.
- Market Capacity - Hedge fund market capacity is another area that has sparked debates and controversy. This led to many questioning the value proposition of this alternative investment option. Moreover, alpha is seen to have become rarer, mainly because volumes traded have reduced the market irregularity that have an impact on the performance of hedge funds and because fund managers are getting increasingly attracted by the remuneration model, which is affecting the talent available in the country.
- Systemic Risk - The long-term capital management disaster that took place in 1998 led to a systemic risk which has been one of the major issues pertaining to the hedge fund debates and controversies. The huge amount of risk that hedge funds can use to achieve the required return is one of the major causes behind the systemic risk. The crashing of the two Bear streams in June 2007 affected the potential for systemic risk.
- Fund Performance - Measuring the performance of hedge funds and adjusting it to the quantum of risk has been a major point in hedge fund debates and controversies. The traditional performance indicators usually follow a systematic return. However, hedge fund returns are not distributed normally and are auto-correlated. Thus, application of these traditional performance indicators cannot be applied to hedge funds reliably and creates a theoretical problem. In order to counter this aspect, several new performance indicators have been introduced, like Omega, Alternative Investments Risk Adjusted Performance, Modified Sharpe ratio and many others. However, no consensus has been reached regarding which is the best performance measure indicator and so the traditional performance indicators are still being used to this day.
- Fund Over Diversification - Another issue is the constant diversification of hedge funds. Mark Kritzman has disputed this matter. He calculated the mean-variance optimization on a set of opportunity comprising bond index fund, stock index fund and 10 hypothetical hedge funds. He found that the most efficient portfolio was one which did not provide any allocation to hedge fund. This, therefore, debates the attractiveness of hedge funds.
- Unethical Practices and White Collar Crime - Hedge fund managers have been the center of considerable controversy due to their high risk investments, complicated investment deals, unethical investment practices, and ongoing investigations by the Securities & Exchange Commission stemming from their investments in risky securities and betting against the market and insider trading. Here are a few examples:
- On June 22, 2011, J.P. Morgan Chase & Co, parent of J.P. Morgan Asset Management, agreed to pay $153.6 million to settle civil charges that it misled investors in a complex $1.1 billion collateralized debt obligation (CDO) portfolio called "Squared" and completed in May 200, then failing to tell them that hedge fund Magnetar helped craft the deal and stood to profit if it failed.
- On Oct. 16, 2009, The Securities and Exchange Commission charged billionaire Raj Rajaratnam and his New York-based hedge fund advisory firm Galleon Management LP with engaging in a massive insider trading scheme that generated more than $25 million in illicit gains. The SEC also charged six others involved in the scheme, including senior executives at major companies IBM, Intel and McKinsey & Company. Mr. Rajaratnam was tried in May 2011 and found guilty on all counts. Mr. Rajaratnam's attorney's filed an appeal. You can read about this complex case in my blog posts dated May 25, 2011, May 23, 2011, May 12, 2011 and November 23, 2009.
- On April 16, 2010, hedge fund operator Paulson & Co. became enmeshed in a Securities and Exchange Commission civil lawsuit filed Friday against Goldman Sachs Group Inc. But the hedge-fund giant wasn't charged. The SEC charged Goldman GS -0.31% with securities fraud for making misleading statements and omissions to investors about a collateralized debt obligation, or CDO, known as Abacus 2007-ACI. Paulson helped Goldman structure the deal and then bet against it, making an alledged $3.7 billion in profits when the sub-prime housing market fell in 2007. But Goldman didn't tell investors that the hedge-fund firm was involved in putting the deal together, or that it was betting against the structure.
Courtesy of an article dated June 22, 2011 appearing in The Wall Street Journal Markets, an article dated June 22, 2011 appearing in The Wall Street Journal Business, an article dated May 12, 2011 appearing in SAI Business Insider, an article dated March 1, 2011 appearing in HedgeFundIndepth