I read an impressive article on Bridgewater Associates (the world's biggest hedge fund) and its CEO Ray Dalio, in the Fortune magazine. His flagship fund has clocked an annual return of 15% over the last 18 years – a very impressive performance indeed. The fund never imploded during the many crises the financial markets have seen over the last two decades. Also, when 70% of the hedge funds lost money last year and the average hedge fund was down 18%, Dalio's fund returned an impressive 14%.
The article claims that over the last two years, the hedge fund industry in aggregate terms has been closely correlated to the S&P 500 and had even reached a 75% correlation. I am not able to digest the fact that hedge funds had such a big bias towards growth even though signs of strain in the economy had begun to surface 2 years ago.
I liked the way Dalio put the current economic woes in perspective:
“Most people think that a depression is simply a really, really bad recession. But in reality, the two are distinct, naturally occurring events. A recession is a contraction in real GDP brought on by a central bank tightening monetary policy, usually to control inflation, and ends when the central bank eases. But a D-process (deleveraging process) occurs when an economy has an unsustainably high debt burden and monetary policy ceases to be effective, usually because interest rates are close to zero, and the central bank has no way to stimulate the economy. To compensate, the value of debt must be written down (risking deflation) or the central bank must print money (a trigger of inflation), or some combination of both.” In recent years the level of debt as a percentage of GDP in the U.S. has skyrocketed past previous highs last seen in the early 1930s. And the Federal Reserve's benchmark rate is now hovering just above zero. "It seems very likely that stocks will get materially cheaper," he says. "We have to go through an important debt restructuring process, and a lot of assets are going to be for sale, huge numbers of assets. And there's going to be a shortage of buyers."
If Dalio’s predictions come true, the expectation that the markets have bottomed out could be short-lived.
1 comment:
I am reading this article almost one year after it is posted. It could be safely said that March 2009 was when markets bottomed out. Another classic example of not having to be right everytime inorder to be successful in investing.
I would also like to point out that whatever debt issue Ray Dalio mentioned is still very much valid.
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