June 24, 2013 / 4:39 PM / 6 years ago

Exclusive: A big Bridgewater fund is under the weather

NEW YORK (Reuters) - A $70 billion portfolio managed by hedge fund titan Ray Dalio’s Bridgewater Associates and widely held by many pension funds to survive stormy markets is emerging as a big loser in the recent selloff in global markets.

The Bridgewater All Weather Fund is down roughly 6 percent through this month and down 8 percent for the year, said two people familiar with the fund’s performance.

The All Weather Fund is one of two big portfolios managed by Bridgewater and uses a so-called “risk parity” strategy that is supposed to make money for investors if bonds or stocks sell off, though not simultaneously.

It is a popular investment option for many pension funds and has been marketed by Bridgewater and Wall Street banks as way to hedge market turmoil.

Bridgewater created a portfolio based on two of the four basic economic scenarios: rising growth, falling growth, rising inflation, falling inflation. Different types of assets do well in each of these scenarios and the all-weather portfolio contemplates spreading its risk evenly.

But money managers familiar with the strategy said it does not perform when both stock and bond prices tumble, as global markets have experienced in recent weeks.

The plunge in the Bridgewater portfolio began soon after concern rose in late May that the Federal Reserve would begin pulling back from its easy money policies, which have included monthly purchases of $85 billion of Treasuries and agency mortgage-backed securities.

The fear the Fed will taper off its bond buying has slammed global stocks and in particular bonds, with the yield on the 10-year Treasury bond surging a full percentage point since May 2, when it closed at 1.62 percent.

The swift jump in bond yields has led to a sharp sell-off in bond prices and prompted investors to pull money out of bond mutual funds. So far in June, investors have pulled $47.2 billion from bond mutual funds and bond exchange-traded funds, the biggest monthly loss on record, according to TrimTabs Investment Research.

The All Weather fund invests heavily in Treasury inflation protected securities, or TIPS, which have lost 4.5 percent in June and over 8.26 percent year-to-date. In fact, the All Weather fund, launched in 1996, was a leader in investing in inflation-protected bonds.

Rick Nelson, chief investment officer for Commonfund, with $25 billion under management for endowments and foundations, said his firm has avoided putting clients into risk parity funds because there are better ways to manage risk.

He said risk parity funds tend to “use a great deal of leverage on the fixed income side” and that can magnify losses. Nelson was not commenting specifically on All Weather because Commonfund has no money with Bridgewater.

The recent poor performance of the All Weather fund is notable black eye for Dalio, 63, who is one of the $2.2 trillion hedge fund industry’s most closely watched managers.

Over the years, Bridgewater’s All Weather Fund and its Pure Alpha portfolio have taken in billions for institutional investors. Between the two portfolios, Bridgewater manages about $150 billion, making it one of the largest hedge fund firms in the world.

The current performance for the Pure Alpha fund, which rose just 0.8 percent last year, could not be obtained.

Last year, the All Weather fund rose 14.7 percent, according to a year-end investor note. Despite recent losses, the fund has still delivered a return of 34 percent over the last three years, according to the sources familiar with performance numbers.

“Ray Dalio and Bridgewater are very smart investors. The model - the All Weather Fund — is beautiful long-term,” said Mark Yusko, founder and chief investment officer of Morgan Creek Capital Management, a firm that advises pension funds, endowments and wealthy individuals. “It doesn’t mean you can’t lose money. All assets are in corrective mode right now.”

Dalio came into 2013 with a bullish view on stocks and other risky assets, according to his year-end investor letter.

“Borrowing cash to hold risky assets is as attractive as it has ever been,” he wrote in the 300-page plus report.

A report on the Bridgewater website explaining the history of the All Weather fund explained the use of leverage, or borrowed money, in the investing process saying, “leverage is an implementation tool.”

Bridgewater is not the only large investor that has been hurt as financial markets have tumbled across the globe over the past month.

The losses inflicted across all fixed-income assets since Fed Chairman Ben Bernanke signaled on May 22 that the Fed could soon dial back its $85 billion a month in bond purchases have been deep: $406 billion of cumulative losses, according to Bank of America/Merrill Lynch Fixed Income Indexes data.

Some of the biggest-name bond investors, including Pacific Investment Management Company, have not been immune to the credit meltdown.

The $285 billion PIMCO Total Return Fund (PTTRX.O), the world’s biggest bond mutual fund, managed by Bill Gross, is down 5.39 percent since the end of April, according to Lipper data on Monday. Meanwhile, the $265 million Pimco Extended Duration Fund (PEDIX.O) has fallen 16.81 percent since the end of April, Lipper data show.

The $495 million TCW Emerging Markets Local Currency Fund (TGWIX.O) has dropped 12.07 percent over the same time, while the $3.2 billion Vanguard Long-term Treasury Fund (VUSTX.O) has lost 10.73 percent.

Reporting By Katya Wachtel and Jennifer Ablan, with additional reporting by Manuela Badawy; Editing by Matthew Goldstein, Kenneth Barry, Dan Grebler and Leslie Gevirtz

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